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Mental Model for FX Changes


Fat Pitch
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I’ve been looking at some companies in South America and noticed a trend of declining revenues, but if you adjust for the FX losses many of this companies are growing like weeds. Many of them are trading at 52 week lows and I’m wondering how others are thinking about the strong dollar vs foreign currencies? Are these FX losses real or just temporary and this provides an opportune time to load up?

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  • 4 weeks later...

I'm going to bump this to get others thoughts. 

 

I've been looking at some US industrials who have a good chunk of their sales oversees and in Q4 '14 and in Q1 I felt that the analysts nor the company had really kept up with the interest rate changes.  Many of them guided to #s that still seemed optimistic if the currency flatlined from its current rate.  Well, over the past Q I've noticed the estimates coming down gradually and the share price with it slowly and feel like they are at a FV to slightly overvalued +10% assuming a flat currency from here.

 

How do others look at this.  I'm starting to look at Canadian companies that high % of USD sales.

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A large cap name I have a big chunk of my net worth in is PM and is currently going through the same issue. Current earnings would be 25% higher if the dollar reversed to where it was 1-2 years ago. Over the past couple of years it has traded sideways as a result and its been running into the FX wind head first.

 

I look at it as a company growing eps ~12% a year on a currency neutral basis plus a 5% div at today's prices. Im OK holding PM for a very long time so although while annoying I know the piece of the business I own in growing faster then what eps is showing.

 

I would say your willingness to invest would be based on how long you plan on holding and your short to medium term view on Fed interest rate policy and what the dollar will do. Holding a business for a long time smooths out currency issues in my mind. The shorter the time frame the more it would change whether or not I would invest as realized value would likely be due to currency changes alone which I cant predict.

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