The weak pound hides the real story behind these 2 top UK stocks

The Motley Fool
Marmite, Unilever
Marmite, Unilever

The weak pound has surprised and delighted investors by powering the FTSE 100 to new highs, and few will be complaining about that. However, you have to look behind the headlines, because soggy sterling is having a different impact on different companies. It may mask hidden threats - or opportunities.


Handbags at dawn

High-end fashion chain Burberry Group(LSE: BRBY) reported a disappointing 4% fall in first half total underlying revenues yesterday to £1.16bn, but that fashion blunder was stylishly offset by what is quickly turning into every FTSE 100 company's favourite accessory: positive foreign exchange effects. Group revenues actually increased by 5% after FX movements were taken into account. Similarly, underlying retail revenues rose 2% to £859m, or a much groovier 11% at reported FX.

Burberry actually enjoyed a double currency boost, with overseas earnings worth more once converted back into sterling, and Q2 like-for-like sales lifted by a surge in fashion-hungry tourists visiting the UK to pick up some post-Brexit vote bargains. Comparable UK sales soared by 30%, against low single-digit percentage growth across Europe, the Middle East, India and Africa.

Out of style

Sterling has helped to dig Burberry out of a trench, helping it survive what chief creative officer and CEO Christopher Bailey calls a "challenging external environment". The company's successful digital strategy is driving sales, and it's also planning £20 million of cost cuts, but it has challenges elsewhere, with sales slipping in former growth zones Hong Kong and Macau, and "uneven demand" in the Americas.

Burberry could enjoy a £105m currency boost this year and it may continue as Brexit negotiations rumble on, which will prove a further drag on the pound. However, it can't rely on the weak pound forever and given challenges elsewhere, it looks pricey at a forecast 21.2 times earnings.

Beyond Marmitegate

Household goods giant Unilever(LSE: ULVR) has more on its mind than Marmite right now. Its share price has suffered an unaccustomed reverse in the last week, falling 7%. This came as a big surprise because it follows a decade of steady growth, which turned the company into one of the UK's most admired bluechips, and one of the most expensive by conventional valuation metrics.

Unilever enjoyed a massive Brexit bounce, as its overseas earnings would be worth more once converted back into weaker sterling. However, the falling pound is a two-edged sword, as it also drives up the cost of importing raw materials for Unilever's products. Sales in the three months to 30 September grew 3.4% at constant exchange rates but turnover, which is measured at current rates, fell 0.1%

Unilever tried to pass the price hike parcel to Tesco, suffering a PR disaster in the process, and reducing its scope to pass on further cost increases. Yet I'm not too worried, this remains a strong global company with a popular range of brands. I only wish the last week had done even more damage to its share price, because it still trades at more than 22 times earnings. Still, it was around 25 times last time I looked, so maybe this classifies as a bargain price. Unilever is still a buy, wherever the pound goes next.

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Harvey Jones has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended Unilever. The Motley Fool UK has recommended Burberry. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.