The value of the pound dropped further on the back of Prime Minister Boris Johnson’s announcement that he would call a snap general election if Parliament votes to delay the Brexit date today. The pound is currently priced around $1.20 and €1.10, the lowest level since 2016. One has to go all the way back to the 1985 devaluation of the dollar to find a period in time when pound/dollar exchange rate was this low.
However, a weakening pound may be good news for some members of the FTSE 100. Although this may seem counter-intuitive, a weaker currency is actually a boon to equities as British companies benefit from their products costing less than those of overseas competitors. These large companies do a lot of business internationally, so a weaker currency actually boosts their earnings.
In terms of individual FTSE 100 stocks, the biggest riser today was Ferguson (LSE: FERG), up 2.9%, and the biggest faller was DS Smith (LSE: SMDS), down over 5%.
Shares of plumbing and central heating specialist Ferguson have been on the rise today due to news that the company intends to spin off its UK operations and devote itself to its US business. Although not all investors are on board with the plan, which is still subject to shareholder approval, the general feeling is that this move will allow both companies to focus on their core markets to a greater degree than Ferguson is currently able to. As my colleague Peter Stephens wrote just yesterday, its dividend is covered 3.1 times by net profit, meaning that management would be able to increase payouts at a faster rate than profit, if so inclined.
It was further reported that CEO John Martin will be stepping down in November to be replaced by COO Kevin Murphy, a US national. The move does seem to make sense, as 80% of Ferguson’s sales and 90% of its profits came from across the Atlantic last year.
DS Smith released its annual report today, and although management attempted to put a good spin on the results, the market has not responded kindly to it. Specifically, annual earnings per share have fallen from 21.2p to 19.7p, although free cash flow jumped from £184m to £339m year-on-year. Revenue also increased (from £5.5bn to £6.17bn), as did operating profit (from £329m to £427m). Perhaps investors are reacting negatively to the decreased volumes seen in some of DS Smith’s important markets, like Germany.
I think more than anything else, this is a case of ‘selling the news’, as shares of DS Smith had traded up over the last month, presumably in anticipation of these results. Although the results were promising overall, they were perhaps not as good as some of the more bullish investors may have been hoping.
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Stepan Lavrouk owns no shares mentioned. The Motley Fool UK has recommended DS Smith. Views expressed on the companies mentioned in this article are those of the writer and therefore may differ from the official recommendations we make in our subscription services such as Share Advisor, Hidden Winners and Pro. Here at The Motley Fool we believe that considering a diverse range of insights makes us better investors.
Motley Fool UK 2019