As the conflict in Ukraine rages on, U.S. President Biden said he supports the idea of Russia being expelled from G20 as a consequence of its invasion of Ukraine.
Amid punishing sanctions and their adverse impact on the Ruble, Russia has said that while it will continue to fulfill its energy supply contract obligations to customers, payments will be accepted in Ruble only.
In this backdrop, markets have been gyrating with certain sectors doing well and certain sectors suffering. Defense stocks have proven winners so far as countries look to shore up their defense capabilities.
On the other hand, some companies have seen an impact on their operations due to their presence in Russia.
Let us take a deeper look at two major names, Coca-Cola (KO), and PepsiCo (PEP), which have seen a negative impact on their stock prices and see how they may fare in the coming months.
Coca-Cola
Coca-Cola has a global presence with well-known brands such as Coke, Fanta, Sprite, Dasani, Bodyarmor, Powerade, Costa, Georgia, Minute Maid, Fairlife, and AdeS. The company has suspended its business in Russia and stated it will “continue to monitor and assess the situation as circumstances evolve.”
Switzerland-based Coca-Cola Hellenic Bottling Co. (Coca-Cola HBC) is Coke’s partner and owns 10 bottling plants in Russia, which is also is its biggest market. Coke has a 21% stake in the company.
The CFO of Cola-Cola HBC, Ben Almanzar had stated before the start of the conflict, “We have looked at all types of scenarios and have ensured that we have contingency plans in place in case there is disruption.”
Looking at the company’s latest performance, Coke’s 2021 revenue of $38.7 billion witnessed 16% growth on the back of increased concentrate sales and better price/mix. However, the company has been seeing cost pressures and an impact on margins.
Coke saw volume growth in 2021, with growth in developing and emerging markets led by China, India, and Russia. Additionally, in Europe, unit case volume growth was led by Russia and Spain. As a consequence of the suspension of Russian business, a drop can be expected in these metrics in the coming periods. The company acknowledged that about 1% to 2% of its top-line came from Ukraine and Russia.
While Coke’s earnings before interest, taxes, depreciation and amortization (EBITDA) margin at 33% is far ahead of the industry median of 13%, the company is far ahead of its peers on other metrics as well. Return on common equity, at 46.2% is over 2x better than the industry median of 13.5%. Net income per employee of $123,680 is better than the industry median of $25,000, indicating that despite the global scale of its operations, Coke is far better and nimble at utilizing its workforce as compared to its peers.
Evercore ISI analyst Robert Ottenstein has reiterated a Buy rating on the stock alongside a price target of $70. Overall, the Street has a Moderate Buy Consensus rating on the stock based on 11 Buys and four Holds. The average Coca-Cola price target of $67.40 implies a potential upside of 10.5% for the stock.
PepsiCo
PepsiCo is known for brands such as Pepsi, Mountain Dew, and Quaker. The company has also announced the suspension of beverage sales, capital investments, and promotional activities in Russia.
CEO of PepsiCo, Ramon Laguerta, noted in a communiqué to the company’s workforce, “Now, more than ever we must stay true to the humanitarian aspect of our business.”
Significantly, the company has 20,000 employees in Russia and a further 40,000 agricultural workers that are a part of its logistics. In order to support them, PepsiCo is continuing to produce milk, baby formula, and baby food. Notably, Russia is PepsiCo’s third-biggest market.
Looking at PepsiCo’s recent performance, revenues for the latest fourth quarter jumped 12.4% over the prior year to $25.2 billion. The company saw 33% growth across Africa, the Middle East, and South Asia regions.
PepsiCo’s EBITDA margin at 18.1% compares favorably with the industry median of 13%, but falls behind Coke’s 33%.
The company’s return on total capital, at 12.5% is ahead of the industry median of 7%. Net income per employee of $24,650 is almost at par with the industry median of $25,000, but falls short of Coke’s efficiency.
Wells Fargo analyst Christopher Carey has reiterated a Hold rating on the stock, but lowered the price target to $170 from $175. The Street has a Moderate Buy consensus rating on the stock based on eight Buys and seven Holds. The average PepsiCo price target of $180.40 implies a potential upside of 9.7% for the stock.
Closing Note
Both Coke and PepsiCo shares have seen an uptick over the past week, after the price decline seen at the onset of the Russia-Ukraine conflict. While these beverage behemoths may see an operational impact in the shorter term, their global scale of operations, well-established portfolio of brands, and broader asset base provide safety of capital for retail investors.
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