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Will Brexit Impact Soda Giants’ Fiscal 2016 Performance?

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Pound falls against dollar

The results of Coca-Cola (KO) and PepsiCo (PEP) in recent quarters have been adversely impacted by currency headwinds as the US dollar continues to strengthen against major world currencies. Due to the impact of Brexit, the pound fell to a 30-year low against the US dollar on June 24. The fall of the pound against the US dollar will likely impact companies that have exposure to operations in the United Kingdom and report their earnings in dollars.

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Currency headwinds

Coca-Cola and PepsiCo have significant international operations. This exposes them to currency fluctuations. In 2015, Coca-Cola and PepsiCo generated 54% and 44% of their respective revenues from outside the United States. Monster Beverage’s (MNST) international revenue accounted for 21.3% of its 2015 net sales. Dr Pepper Snapple Group’s (DPS) international revenue accounted for 11.3% its fiscal 2015 revenue. The company’s international exposure is limited to Mexico, the Caribbean, and Canada.

In 1Q16, Coca-Cola’s adjusted EPS (earnings per share) fell by 6.3%, with currency headwinds having an impact of 12 percentage points. PepsiCo’s 1Q16 adjusted EPS rose by 7.2%, driven by an improved gross margin and a strong performance by the company’s North America business. However, currency headwinds had an impact of 4 percentage points on the company’s adjusted EPS. Together, Coca-Cola and PepsiCo account for 9.3% of the iShares Global Consumer Staples ETF (KXI).

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Dr Pepper Snapple Group’s 1Q16 adjusted EPS grew by 16% in 1Q16, driven by higher sales and enhanced margins. The company’s adjusted EPS growth was negatively impacted by currency headwinds of 1%. Monster Beverage’s adjusted EPS increased by 26% in 1Q16, as strong energy drink sales offset the impact of currency headwinds. Adverse currency fluctuations impacted Monster Beverage’s net sales by about $12.3 million in 1Q16.

Uncertainty in the United Kingdom

The process of the United Kingdom exiting the European Union is estimated to take over two years. Also, Brexit may trigger more exits from the European Union. Such uncertainty can lead to more volatility in the pound and euro exchange rates against the dollar and cause greater currency headwinds for soda giants.

As mentioned in the first part of this series, Coca-Cola derived 10.3% of its 2015 net operating revenue from Europe. In 2015, revenue from the United Kingdom accounted for 3.1% of PepsiCo’s total revenue. In all, PepsiCo generated 16.7% of its 2015 revenue from the Europe Sub-Saharan Africa region.

We’ll discuss the valuations of soda giants in the concluding part of this series.

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