All the big international cosmetic and personal care players forewarned that currency exchange rates were likely to be one of the biggest challenges they will face in 2015, but analysts believe the warnings are about to really play out, particularly as the US currency continues to gain ground.
This outlook was reaffirmed late last week, when BMO Capital Markets analyst downgraded the company’s shares from Outperform to Perform, simultaneously lowering the price target for shares for $100 to $84.
In the note accompanying the downgrade, BMO analyst Connie Maneaty cited the primary reason for the downgrade as being down to the fact that 65% of its business is derived from outside the US domestic market.
On top of that, she also noted that many of the markets P&G is exposed to are countries where currencies are particularly weak at the moment, particularly the Eurozone, Brazil and Russia.
Opening up a can of global financial issues
Financial experts saw the downgrade as a bold step, but also one that underlines the struggles many international companies are facing now, which is being compounded by slowing growth in China and Brazil. So far no other ratings agencies have followed suit in downgrading the company.
In particular P&G's headache is being further compounded by government-instigated price controls in both Venezuela and Argentina, which account for 2% and 1% of its global sales, respectively.
Interestingly investors took little heed of the downgrade, with share prices fluctuating no more than 50 cents following the announcement, and were trading at around $82.64 a share on the NYSE in early morning trading on 6th April.
Tough times ahead
When P&G announced its second quarter sales back in January, currency exchange was already presenting the company with significant challenges.
Reported net sales for the quarter were $20.2 bn, a decrease of 4%, including a negative five percentage point impact from foreign exchange.
Underlining the impact of the currency exchange, the company’s organic sales actually grew by 2% during the period.
CEO called situation in Q2 ‘unprecedented’
Speaking about the company's second quarter back in January, CEO A. G. Lafley stated that currency devaluations made the quarter challenging, describing the circumstances as ‘unprecedented.’
"Virtually every currency in the world devalued versus the US dollar, with the Russian Ruble leading the way,” he said.
"The outlook for the year will remain challenging. Foreign exchange will reduce fiscal 2015 sales by 5% and net earnings by 12%, or at least $1.4 billion after tax.”