Drop in dollar brings mixed fortunes

WEAKNESS in the US dollar, at four year lows against the Swiss franc, is bringing mixed fortunes for two prominent Irish groups, according to recent research.

It is bad news for Waterford Wedgwood where a 10% decline can knock up to 1.8c off its earnings over a year.

However the group has been cutting its cost base and has shed 1400 jobs since it began a rationalisation programme back in November 2001.

That move will save an estimated 3.3 cent this year and 4 cent in the year to March 2004. In round figures the total annual savings is put at €43m in savings over a 12 month period, sufficient to offset any negative impact from a steadily weakening dollar.

Critics say the group has had enough practice in that context and suggest the exercise will have been very important in increasing earnings per share to 6-7cent or the year against 5.3 cent in the year to December 31 2001. The previous year’s earnings in 2000 were 10 cent, which shows how far the rating of the group has slipped in the meantime.

Markets are getting impatient, a fact reflected in the low value of the shares that are trading at 44c at present.

With markets in the US still struggling, analysts are pinning much of their hope for the current year on the cost cutting to drive this year’s performance.

John Sheehan of NCB, in a note on the US situation which continues to be a negative for the group, reckons WW is worth adding to a share portfolio at this point.

He has been impressed by the cost cutting and the efforts by the group to streamline its US distribution.

Overall he regards the outlook for the group as pretty testing, given the US uncertainties, and WW’s difficulties in sustaining sales which will be down this year overall on last year.

But he still reckons the shares are worth a punt at 44c, given they reached a high last year of 97c and were close to 160c five years back.

Even with the dollar implications, his sense is that management at the group have finally faced up to the cost issues and have demonstrated an ability to deal with them head on.

Speculation about a management buy out in recent months has angered the group.

That story had a number of different sources, with George Soros mentioned as a potential investor.

Its debt, which stood at well over €400m at the half year, is seen as an obstacle to such a move however by Sheehan and the speculation of a buy-out has not influenced his Add recommendation for the stock.

Meanwhile, NCB has taken the totally opposite line on Fyffes the fruit importer.

The continuing appreciation of the euro is a boon to the group with a 10% euro appreciation set to boost Fyffes’ earnings by about 2%.

Higher banana margins in the first half of the year are all the more significant due to the higher volumes shipped in the first half of the year.

Lower supplies due to some El Nino effects are also tending to boost current pricing momentum further, underpinning the earnings outlook for the group.

NCB has given the stock a Buy recommendation.

Goodbody Stockbrokers are also pretty strong on the group currently trading at €1.27.

They are maintaining a price target of €1.60 because of the discounted rate of the shares relative to its peers.