Prudential and Wolseley to gain most from sterling dip, Morgan Stanley says
Analysts at Morgan Stanley have suggested several stocks that could receive material boosts from the recent dip in the sterling exchange rate against the dollar, which has been driven down from $1.71 toward $1.66 by dovish comments from the Bank of England and lower-than-expected inflation.
Morgan Stanley said it has an overweight rating on Prudential, Wolseley, Intertek, Smiths Group and Croda.
Life insurer Prudential is estimated by the investment bank to have 38% of its operating profit dollar-denominated in its first half results, while its US business Jackson will benefit from a weaker pound. Analysts are also big fans of Prudential's Asia life insurance unit, adding much needed diversification and holding a "very strong distribution footprint versus the peer group."
On Wolseley, which has 80% of its business based in the US and the UK, Morgan Stanley predicts the building materials group will see a 0.5% rise in earnings per share (EPS) from the weaker pound. It also predicted "attractive, above-consensus" dividend payouts.
Engineer Smiths Group is could see 2015 EPS lifted 1.6% by a 1% fall in the currency pair. Smith also has the makings of a potential M&A target, said Morgan Stanley.
Testing and clinical services group Intertek is 10% exposed to the pound and 50% exposed to the dollar and hence should see an increase of 0.4% in EPS in 2015, and 0.3% on 2016 EPS. Analysts, adding the impact could grow even larger if the pound also weakened versus some key emerging market currencies. Intertek benefits from other current macro drivers, as it has the lowest exposure among the biggest three testing companies to the mining industry "where headwinds to growth will likely persist into 2015".
Finally, Croda International, the chemicals and plastics specialist, would see a 1% pound-dollar move result in a 1.3% jump for earnings before interest and taxes, according to the analysts. The company has also suffered a relative de-rating against peers and the broader market which the is viewed as "unjustified".