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Concerns about tax increases and spending cuts have caused the pound to fall against the dollar. But this could be an opportunity for UK investors to look at shares in companies that do business in the US.
A number of FTSE 100 firms generate a significant amount of their revenues across the Atlantic. And, in my view, a couple in particular stand out as truly exceptional companies.
Experian
FTSE 100 credit bureau Experian (LSE:EXPN) generates more than two-thirds of its sales in the US. So a weaker pound should benefit investors who collect dividends in the UK.
At today’s prices, the stock trades at a free cash flow multiple of around 25. And I don’t think that’s unreasonable in the context of where markets are at the moment.
Right now, 10-year government bonds come with a 4.8% yield. But the company’s competitive position as part of an oligopoly with Equifax and TransUnion gives it some strong growth prospects.
That gives the firm strong pricing power. And even as the US shifts away from requiring reports from all three businesses, demand for Experian’s reports is still strong.
Operating across the Atlantic means the company is subject to risks with the US economy. These include the potential inflationary effects of tariffs weighing on demand for housing.
I think, however, the main challenges the company is facing are cyclical ones. While its long-term competitive position remains intact, the stock is worth investors having on their radars.
Compass Group
Compass Group (LSE:CPG) is a contract catering business. It operates in a market that’s likely to grow over time and economies of scale give it an important advantage over its competitors.
The firm’s size allows it to negotiate better prices from suppliers. And its decentralised structure allows it to combine this with being attentive to specific customer needs and requirements.
Demand for external catering has been – and is likely to be – resilient. But it isn’t likely to increase rapidly and this means acquisitions are likely to be key to Compass Group’s future growth.
As with any acquisition, there’s always a danger of overpaying and getting a bad return, which can be value-destructive for shareholders. That’s a risk for investors to consider.
Focusing on businesses that can be added to its current setup, however, reduces this risk. And with sales from existing operations still growing at 8.6% a year, there’s still growth on this front.
Like Experian, Compass generates around 66% of its sales in the US, so the dollar strengthening against the pound should give it a boost. And I think it’s worth considering at today’s prices.
Cable
The value of the pound against the dollar – sometimes known as ‘cable’ – falling should benefit UK companies that generate a lot of revenue in the US. And this is worth paying attention to.
Over the long term, a strong competitive position is what matters most when it comes to finding stocks to buy. And Experian and Compass Group clearly have this in their respective industries.
Right now, I think both trade at valuations that are about fair. But with both generating the majority of their sales in the US, a short-term currency boost might make it a good time to consider buying.
