Stocks most exposed to Russia

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The economic fallout from Russia’s war on Ukraine will soon begin to show on the balance sheets of major US corporations. McDonald’s recent announcement to exit Russia after 30 years in business could hurt the global fast-food chain with significant exposure to the country.

McDonald’s joins an exodus of Western companies from Russia as they begin to abandon their Russian business operations. This should have a significant impact on their bottom line at a time when they are battling rising commodity prices due to inflation and global economic uncertainty.

The following S&P 500 stocks generate the highest percentage of Russia’s total revenue. By suspending or closing their operations in Russia, these American conglomerates risk losing billions of dollars in revenue. On the bright side, they can save a lot more in reputation costs by appearing to do the right thing in the face of a humanitarian crisis unfolding in Ukraine.

McDonald’s (MCD), the world’s largest restaurant owner and operator, has sales of US$112 billion in more than 40,000 stores and 119 countries. The global fast-food chain pioneered the franchise model, building its impressive footprint through partnerships with independent restaurant franchises around the world. It generates nearly 60% of its revenue from franchise royalties and rental payments, with the remainder coming from company-operated stores in the United States and international markets.

The Golden Arches recently announced their decision to leave Russia. The company, which first entered the Russian market 32 ​​years ago, has already started the process of selling its entire portfolio of more than 800 restaurants.

The company, which generated approximately 9% of its revenue comes from Russia and Ukraine in 2021, plans to take a write-off from US$1.2 billion to US$1.4 billion following the move.

“This move was already considered in our base case, with our forecast removing revenue (9%), operating profit (3%) and future unit growth from Russia and Ukraine,” a report said. on Morningstar shares, adding that “McDonald’s decision to exit Russia reflects growing consumer pressure boycotting companies that continue to operate in this market.”

As a global leader in foodservice sales, McDonald’s is taking the right steps to adapt to a competitive landscape. “Recent initiatives, including the launch of a loyalty program, a large line of white chicken sandwiches and the test-marketing of a McPlant burger, demonstrate a sharper sense of market demands,” says the Morningstar equity analyst Sean Dunlop, who recently lowered the stock price. fair value at 227 USD against 250 USD, “after having digested the results of the first quarter”.

Beverage giant PepsiCo (PEP) sells snacks and soft drinks worldwide under popular brands Pepsi, Mountain Dew, Gatorade and Aquafina in the beverage space and Lays, Cheetos and Doritos in snacks.

The company holds a dominant share of the global snacks industry with six of the top 10 brands in savory snacks and the second position in soft drinks. Overall, Pepsi makes 60% of its sales and two-thirds of its operating profit in North America.

The company recently joined a growing list of top US companies suspends operations in Russia, including its beverage business. Russia accounted for US$3.4 billion, or more than 4%, of its overall revenue.

Despite this decision, Morningstar equity analyst Erin Lash said “We continue to believe that the company’s pricing power, the strength of its leading snack and beverage brands, coupled with its differentiated packaging and marketing capabilities, should support its competitive position. »

Within snacks (55% of sales), Pepsi dominates the global competitive landscape (7 times its closest competitor, with five of the top six brands). “Its core brand building advantages – direct partnerships with retailers, innovation to align with consumer preferences, and data analytics – enable it to drive growth in its underlying categories,” says a Morningstar report. on stocks.

Pepsi’s broad moat is underpinned by intangible assets and cost advantages it has built in the snacks and beverages businesses. “The company maintains an extraordinary collection of top global brands, as evidenced by Pepsi’s consistent ability to raise prices without a lasting impact on volume,” says Morningstar equity analyst Chris Owen, who assesses the stock’s fair value. at US$164.

The cigarette and tobacco products company, Philip Morris International (PM) manufactures and sells its products in markets outside the United States.

In response to Russia’s war against Ukraine, the company recently announced its decision to halt its operations in Russia as part of an exit plan from the country.

Russia and Ukraine represented approximately 12% of PMI’s total cigarette and heated tobacco sales and approximately 8% of net sales.

The parent company of the Marlboro brand said it stopped many of its cigarettes in Russia and reduced manufacturing activities and canceled all product launches in Russia for 2022, among other activities.

The Big Tobacco Company has made efforts to diversify a significant portion of its cash flow away from cigarettes. “Philip Morris International’s Unsmoke campaign signals an intention to go further in replacing cigarettes with lower-risk alternatives,” a Morningstar equity report said, noting that “management’s latest medium-term goals imply strong growth over the next three to five years. ”

Morningstar Chief Industry Officer Philip Gorham said, “The new products will be key to reigniting consumer adoption, and we expect PMI to reformulate its disposable heated tobacco product, TEEPS, within a year or so. of them.”

The firm’s broad economic moat, or sustainable competitive advantage, stems from intangibles, cost advantage, and regulatory barriers to entry.

Furthermore, “consumers are quite brand loyal, especially in the high-end price segments, towards which PMI’s portfolio is skewed, creating another intangible that is no longer as prevalent as it is. was once in other consumer categories,” says Gorham, who sets the stock’s fair value. at $103.

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