2 stocks I'd avoid despite profiting from sterling's slump
Since the EU referendum, the pound has weakened versus the dollar by around 17%. Clearly, this has been hugely beneficial to companies that report in sterling but that operate and generate lots of sales abroad. But while this improves the investment case in the short term for such stocks, these two companies continue to lack long-term appeal.
Millennium & Copthorne
Today's update from Millennium & Copthorne(LSE: MLC) shows that the hotel company has benefitted from sterling's slump. It added £43m to its revenue of £615m and £7m to its £98m pre-tax profit for the first nine months of 2016. And with sterling likely to weaken even further over the coming months as Brexit discussions begin and US interest rates rise, Millennium & Copthorne's financial performance could continue to improve further.
However, the underlying performance of the company was far less impressive. When the impact of sterling was excluded from the results, Millennium & Copthorne's revenue for the first nine months of the year fell by 3.2% and its pre-tax profit was 2.9% lower than the same period of the previous year. That's partly because of challenging trading conditions in its New York and Singapore hotels, with margins in particular being disappointing.
Looking ahead, Millennium & Copthorne is forecast to grow its earnings by 33% in the current year, but then they're due to flatline next year. Taking into account the current year's impressive growth (which is due considerably to weaker sterling and would be dented significantly if and when sterling eventually rises), Millennium & Copthorne trades on a price-to-earnings (P/E) ratio of 16.8. Given its difficult outlook, this means that it lacks appeal at the present time.
Online fashion retailer Asos(LSE: ASC) is also benefitting from weaker sterling. Its US sales increased by an extra 10% (50% versus 40%) because of the impact of sterling in the most recent financial year. Although the firm is winding down its China operations, the EU, America and rest of the world remain key growth markets for its fashion offer. If sterling weakens further, its top and bottom lines should receive a positive catalyst in the near term.
In fact, Asos has a bright growth outlook. Its bottom line is forecast to rise by 22% in the current year, which is a much higher rate than that of the wider market. However, much of this growth appears to already be priced-in, since it trades on a price-to-earnings growth (PEG) ratio of 3.1. This indicates that there really is little upside potential, while its downside risk is high should its sales performance come in below guidance.
Although this is undeniably a high quality company with a sound strategy and business model, its valuation is simply too high to merit investment. That's the case even if the pound continues its downward slide.
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Peter Stephens has no position in any shares mentioned. The Motley Fool UK owns shares of and has recommended ASOS. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.