U.S. companies selling their goods in Venezuela will be pinched by the government's move to devalue its currency, as many of their products will cost more for consumers and their earnings will take a hit.
Avon Products Inc and Colgate-Palmolive Co should feel the biggest pinch in the household and personal product sector as they derive a greater percentage of their total sales from Venezuela than their peers, analysts said.
Items classified as nonessential now carry an exchange rate of 4.3 Venezuelan bolivars per dollar, up from 2.15 previously and compared with a new rate of 2.6 for essential imports such as food.
That means companies that had been translating their statements from Venezuela into U.S. dollars at the official exchange rate of 2.15 must now translate at the new rate of 4.3 if the goods are deemed nonessential.
BMO analyst Connie Maneaty analyst downgraded the whole personal and household product sector she covers to market perform from outperform on Monday.
Maneaty had downgraded Avon, Colgate and Kimberly-Clark Corp back in early December over concerns about a potential devaluation. On Monday, she downgraded Procter & Gamble Co .
She also cut earnings estimates for companies that do business in Venezuela such as Avon, Colgate and Energizer Holdings Inc , and slashed price targets on shares of those three companies.
Avon shares fell 3.7 percent in morning trade, the sharpest drop in the sector. Energizer fell 2 percent, P&G was down 1.9 percent, and Colgate and Kimberly-Clark each fell 1.8 percent.
Companies exposed to Venezuela could feel an average earnings hit of about 2 percent from translating business from that country into U.S. dollars, Bill Pecoriello of Consumer Edge Research estimated.
His firm estimated an earnings-per-share hit of about 6 percent for Avon, 4.7 percent for Colgate and 2.7 percent for Energizer, and smaller hits for other U.S. consumer products, food and beverage companies.
COLGATE ALONE SO FAR IN DETAILING EXPECTED IMPACT
Colgate said on Monday it expects to recognize a one-time gain in the first quarter and larger charges throughout 2010 related to the devaluation, which should not affect its financial position.
Venezuela accounts for about 6 percent of sales at Colgate, according to analysts.
P&G, the world's largest maker of household products, derives a greater amount of sales from Venezuela than its peers, but those sales account for a smaller, undisclosed percentage of its total sales.
In October, Avon said Venezuela accounted for about 5 percent of revenue and 11 percent of operating profit during the first nine months of 2009. At that time, it said that if Venezuela were designated as a highly inflationary economy and there was a devaluation, its earnings would be hit.
Spokeswomen for Avon and P&G said their companies were reviewing the situation. A spokeswoman for Energizer could not be reached.