And you want to pay higher multiples for this?
"This" being absurdly weak revenue due to the resilience of the dollar. Have investors forgotten about the impact that currency has on top lines? I reason so, lured to sleep through the years by execs promoting "organic" revenue figures that strip out currency effects.
Last time I checked, basic valuation techniques take into account currency, and the world is never as perfect as driving "organic" revenues. I suggest you best start paying attention to "currency headwinds" that are surfacing this earnings season. Major companies have found no solution to protecting results:
IBM (IBM): Took a 9% top-line hit due to currency translation, wiping out progress the company is making to expand its services and software revenues. Although the company, like most old-line tech companies, remains in restructuring mode, currency translation could trigger deeper, headline-grabbing changes in 2016 and 2017. And now, investors are left trying to decide whether 9.3x forward earnings to own IBM is "cheap" -- this is a topic I suspect value investors will trumpet in the weeks ahead. I think this is exactly the opposite type of investment you want to wade into right now, the perceived value play getting crushed by currency volatility. IBM's estimates need to be severely marked down, which will likely pressure shares of comparable companies.
Hasbro (HAS): Excluding an unfavorable $126.7 million impact of foreign exchange, net revenues in the toy maker's international segment grew 14% in the third quarter. Wow. I think this was a big reason the stock got walloped on Monday. Organic sales globally were solid, boosted by demand for Star Wars toys and Monopoly. However, the market's reaction to the raw numbers suggests finally an interest in paying attention to overall sales of companies. Similar to IBM, I don't believe Hasbro has a solution to currency other than to wait until the dollar weakens and price increases start to shine through.
Here are the companies likely next in line to show a meaningful sales hit from currency:
Coca-Cola (KO): What I am most interested in here is if currency wipes out progress being made to more tightly manage costs. Nevertheless, at 20x forward earnings, I think the market is being too optimistic that Coca-Cola could offset currency pressures by selling mini cans of soda. There could also be negative headline risk on the company's Wednesday earnings call from comments on demand in emerging markets, where PepsiCo recently mentioned challenges exist.
Procter & Gamble (PG): The company's third-quarter results were likely crushed by currency. Not helping matters is that this is a company in disarray, losing a share in countless categories and now trying to install a new CEO. Nothing good is likely to happen when P&G reports later in the week. Investors currently paying 17.8x forward earnings to own this dog might want to put the pipe down.
Caterpillar (CAT): Another grossly overvalued multinational at almost 18x forward earnings. I think leadership changes are needed badly at the heavy equipment maker -- the current CEO has consistently overpromised and underdelivered (and makes ridiculous amounts of money), and it's time for some fresh eyes. The stock remains vulnerable due to several factors: (1) currency; (2) brutal slowdown in global energy markets, something highlighted by Schlumberger (SLB) last week; and (3) optics of potentially announcing even more restructuring, which has become a long-running theme at Caterpillar.
Relevant Chart of the Day
Reinforcing the view that stocks are overvalued right now in part due to currency are signs that profit corporate margins have peaked. Companies are not demonstrating to investors they can reaccelerate profit margin expansion either through deeper cost cuts or aggressive global price increases. Realistically, currency volatility will have to subside, bringing to the surface work being done to run more efficiently, for profit margin comparisons to become more favorable.