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Financial Freedom

Venezuela’s Currency Spells Disaster for Investors

Hugo Chavez is no longer among the living. Yet, if the outlook for investing in Venezuela is any clue, the dictator’s legacy is still kicking.

In the form of a state-controlled economy, that is. Before he died in 2013, Chavez promoted a currency exchange rate that overvalued Venezuela’s note, the bolivar. As a result, foreign investors’ profits looked larger than they were.

These “phantom profits” resulted in big numbers and good vibes among execs. The system worked well enough until inflation increased from currency restrictions.

In January, inflation in Venezuela jumped 22.2%. It is now more than 60%. In response, Venezuela moved for more devaluation efforts on top of past ones.

Of course, that gave companies a massive profit hangover. In some cases, Venezuela’s confusing exchange rates have ground the wheels of commerce to a halt.

Earlier this year, the lack of on-hand dollars caused Toyota Motor Corporation (NYSE: TM) and Ford Motor Company (NYSE: F) to briefly halt production. Because dollars were scarce, parts for vehicles could not be imported, according to The New York Times.

As Venezuela continues down the road to stagflation, one thing is for sure: There will be effects on the stock market.

More than 100 foreign companies are stuck in the negative pull of Venezuela’s rate, according to Morningstar analysts. Here are the big ones, along with insight into the country’s future in foreign investment.

Plummeting Profits and Pullouts

For the last five years, Venezuela has blocked foreign firms from bringing profits back to their home countries. As a result, these trapped profits have languished under government devaluation efforts.

Right now, there are three different exchange rates used by the government, as well as a healthy black market exchange. With each devaluation comes a deep blow to profits, and firms have no choice but to write them off at the new rate.

The blow has been staggering for a long list of companies. After the last round of devaluations, Estee Lauder Co. (NYSE: EL) ate $38 million and Avon Products Inc. (NYSE: AVP) lost $42 million.

It is also a glum outlook for Herbalife Ltd. (NYSE: HLF) and Goodyear Tire & Rubber Company (Nasdaq: GT). Both stand to lose $103 million and $235 million, respectively, after changing to the new rate.

Unfortunately, authorities have undervalued the exchange so much that companies will receive little more than 11% of each original deal, according to Breitbart.com. Brink’s Co. (NYSE: BCO), an armored car company with a network in Venezuela, is set to lose $400 million from the new rate.

What’s more, Brink’s said had the adjustment been applied to last year’s revenue, it would have seen operating profits drop by 31%. The company would have shrunk by 88%, as well.

Investors are noticing, too. In its quarterly report in April, the company stated, “We do not expect Brink’s Venezuela to be a significant component of Brink’s consolidated revenue or operating profit in the last nine months of 2014.”

A Shared Market Chill

Venezuela’s airline industry, a mix of foreign companies, serves to magnify the crisis. Many are either reducing or canceling service to Venezuela altogether.

Like other companies who turn a profit in Venezuela, airlines are not able to take back their profits at a fair return. Thus, $3.9 billion in profit from 24 carriers is locked up in bolivars.

Naturally, it’s left carriers with no choice but to cut or suspend service. American Airlines Group Inc. (Nasdaq: AAL) said it has around $750 million in profits caught up in Venezuela. Along with Delta Air Lines Inc. (NYSE: DAL), the company has made deep cuts to flights.

Air Canada (OTC: AIDEF) suspended service due to “onerous currency restrictions imposed on all airlines.”

The Stock Effects

In the short term, analysts predict stocks to fall further as the crisis digs into Venezuela’s economy. For Brink’s, the announcement to adhere to the new exchange rate sent stock prices tumbling by 12%.

Analysts think similar companies, like DirecTV (Nasdaq: DTV) and MercadoLibre Inc. (Nasdaq: MELI) may follow suit. If regulation loosens in Chavez’s absence, however, there could be a bright spot to this sob story.

According to CNBC stock analyst Jim Cramer, companies who outperform expectations in Venezuela could stand to get a stock boost. Provided the system changes, that is.

“This looks like the beginning of the end of the Chavez, two-tiered, very-punitive-to-U.S.-companies foreign exchange system,” Cramer stated in a CNBC story. “I think that you want to own those stocks.”

Avoid picking up large amounts of stock in Venezuelan-invested companies unless serious reform takes place. Even if they make a profit, there is no guarantee it will make it from the border to your portfolio.


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