The Motley Fool

It’s Too Easy To Blame The British Pound (And Not IMI plc, Rolls-Royce Holding PLC And Burberry Group plc)

“The governing council is comfortable with acting next time,” European Central Bank President Mario Draghi told the world on Thursday. “Next time” is June.

At a time currency swings take the blame for poor performances at British firms, Mr Draghi’s words carry greater significance for IMI (LSE: IMI), Rolls Royce (LSE: RR) and Burberry (LSE: BRBY), which have recently voiced their concern for a strong British pound.

5G is here – and shares of this ‘sleeping giant’ could be a great way for you to potentially profit!

According to one leading industry firm, the 5G boom could create a global industry worth US$12.3 TRILLION out of thin air…

And if you click here we’ll show you something that could be key to unlocking 5G’s full potential...

Draghi Put & GBP Strength

In the wake of Mr Draghi’s dovish remarks, the British pound strengthened, hovering around its one-year high against the euro, while bonds in Europe’s periphery rallied — these trends were confirmed on Friday. Noteworthy: the British pound has been trading around its five-year high against the US dollar for some time.

Executives at several UK companies have pointed out that a strong sterling is not convenient for their businesses. But what a strong pound means for the firms they lead remains unclear.

In fact, the short-term benefits of a strong pound may well outweigh the losses.  

IMI, Rolls, Burberry And Unilever

IMI, Rolls Royce and Burberry are different animals but have similarly warned investors in recent weeks. Their revenue and earnings have been affected, to a different degree, by a strong domestic currency that renders less valuable revenue and income generated abroad.

Strength in the reporting currency has several effects. When revenue and earnings take a hit, the same rule applies to the cost base – it goes down, too. Currency hedging and the ability to match revenue and production hubs are useful tools, but inherent currency risk can’t be avoided if a business boasts international exposure.

In our view, blaming currency swings for a reduction in revenue and earnings belongs to the “managing expectations” category. The strength of the pound notwithstanding, what appears evident is that IMI, Rolls Royce and Burberry are struggling to create value for shareholders as they have problems either with their core operations or in their end-markets.

On Thursday, IMI was the latest British firm to report lower revenue blaming a strong sterling. IMI reports only 6% of revenue from the UK, so its profits are heavily dependent on currency trends.

Its share price in the last two trading sessions has dropped less than 1%. Exchange rate hurdles may have already been priced into the stock, but they don’t justify IMI’s performance year to date (-13%). Regardless of the depreciation of 60% of its revenue generated in US dollars and euros, IMI is finding it difficult to create value.

Earlier this month, Rolls Royce blamed the strength of the pound for a drop in revenue — 0.45% was the impact — and earnings, but Rolls-Royce stock is down almost 20% year-to-date. Just like IMI, more than 60% of Rolls’ revenue is exposed to fluctuations of the euro and the US dollar. Management is responsible for flat revenue and profits, not the sterling.

Burberry, whose stock is up a mere 1.4% in 2014, generates about 25% of revenue in UK and 21% in North America, with the reminder from China and other countries. Current exchange rates could have a material adverse impact on 2015 earnings, Burberry said, and would reduce earnings by about £30 million (roughly 10% based on trailing figures).

But should Burberry blame exchange rates for its performance?

Since July 2011, the stock has traded in the £10-£16,6 range, after a rally which yielded a pre-tax capital gain of 693%, excluding dividends, between November 2008 and mid-2011. The luxury bet, much in vogue in the wake of the credit crunch, is just that – a luxury – for several investors these days.

Elsewhere, Anglo-Dutch consumer goods behemoth Unilever (LSE: ULVR) – which generates about 30% of revenue in Europe – blamed a strong euro, but its stock is up 7% this year. This reflects investors’ preferences in a market where stock picking is not as easy as it was one year ago.

Elsewhere In The Press

The Financial Times recently discussed the topic; their findings are here.

 A key part of the report follows:

“Changes in UK manufacturing, with supply chains, offshoring of production and a shift to higher-tech products, “make the impact of exchange rate moves on ‘competitiveness’ more ambiguous in the short run,” Neville Hill, an economist for Credit Suisse, reportedly said.

“One businessman who might agree is Gary Lydiate, chief executive of Kilfrost (…). The bitter US winter has made it a bumper year for the family company – and Mr Lydiate has been more worried about shipping raw materials up frozen rivers than about the exchange rate,” the FT reports.

Who is to blame after all?

“This Stock Could Be Like Buying Amazon in 1997”

I'm sure you'll agree that's quite the statement from Motley Fool Co-Founder Tom Gardner.

But since our US analyst team first recommended shares in this unique tech stock back in 2016, the value has soared.

What's more, we firmly believe there's still plenty of upside in its future. In fact, even throughout the current coronavirus crisis, its performance has been beating Wall St expectations.

And right now, we're giving you a chance to discover exactly what has got our analysts all fired up about this niche industry phenomenon, in our FREE special report, A Top US Share From The Motley Fool.

Click here to claim your copy now — and we’ll tell you the name of this Top US Share… free of charge!

Alessandro does not own shares in any of the companies mentioned. The Motley Fool owns shares in Unilever and has recommended shares in Burberry.

Where to invest £1,000 right now

Renowned stock-picker Mark Rogers and his select team of expert analysts at The Motley Fool UK have just revealed 6 "Best Buy" shares that they believe UK investors should consider buying NOW.

So if you’re looking for more top stock ideas to try and best position your portfolio in this market, then I have some good news for your today -- because we're offering a full 33% off your first year of membership to our flagship share-tipping service, backed by our 'no quibbles' 30-day subscription fee refund guarantee.

Simply enter your email address below to discover how you can take advantage of this.