Will Pepsi lose its fizz in Russia

Stocks had a mixed close yesterday after the fighting, rhetoric, and sanctions in Eastern Europe ramped up.Treasury yields fell as money flowed into the safe haven driving prices higher.

Any Weather is Pepsi Weather.  If you can remember that slogan, you get a gold star. That was the company’s tagline in the late 1950’s when it first made its way into the Soviet Union. If you lived in the Soviet Union, it is not likely that you knew about it…right away. I have this really close friend who emigrated from what was, at the time, the Soviet Union. He lived in a small city in what is now Western Ukraine. Today, he is American as they come, but every now and then he relays fond memories of his teen years behind the iron curtain. If you are of a certain age, you surely remember the images of the Soviets standing in endless lines for bread, milk, sausages, Levi jeans…you name it. The only thing that was readily available, according to my friend, was government subsidized vodka. I suppose that makes sense, and it certainly fits the image which we, outside the Soviet bloc, were led to believe. So, as you might guess, one story told by my friend stands out. In this particular yarn, he remembers waiting on line for hours, if not days, to get his hands on a small bottle of…you guessed it…Pepsi Cola. He remembers the very moment that he first tasted it.  It was nothing like anything he had tasted in his life prior. Now, I also happen to know his mother, who is a fantastic cook, so it is not as if he was lacking for good taste, but because it was so different, the moment, the taste, and the brand are forever emblazoned in his mind. You can say that he caught the Pepsi spirit, which is interesting as he emigrated when the company’s slogan was… Catch That Pepsi Sprit. 

Things have changed a bit since those times. The Soviet Union was disbanded in 1991 which opened up pathways for greater trade between Russia, its former satellite states, and the rest of the world. Turning the clock forward, Russia has become the 2^nd largest energy producer in the world and is a major exporter of many other commodities. All of this has been thrown into sharp focus over the past few weeks as Russia began to rattle her saber and ultimately invade neighboring Ukraine. Aside from the human tragedy, many have focused on the economic side effects of not only the war, but also of the harsh sanctions placed on the aggressor. We have seen energy prices skyrocket along with wheat, corn, steel, aluminum, potash, etc. Yesterday however, another side effect fell into our field of view.  Looking to the top of the S&P500 laggers list was a company called EPAM Systems which lost some -45% in yesterday’s session. The US-based company is an outsourced software developer which employs many developers in Russia and Ukraine. The company is profitable and has returned double digit earnings growth hitting a recent peak growth of +46.5% for 2021. That type of EPS is likely the reason for why the company’s stock gained +86% last year…and why it advanced by +68.9% and +82.88% in the prior two years. The company announced yesterday that it was withdrawing its forward guidance due to the uncertainties caused by the Russian/Ukrainian conflict. In the case of EPAM, it relies on the region for not only its employees, but it also derives some 4.15% of its revenues from the region. Looking down a list of US listed companies with market caps greater than $1billion that derive revenue from the region, we see Yandex and Ozon Holdings. Yandex and Ozon derive 100% of their revenues from the region and each fell by -51.95% and -22.87% respectively last week.  Both stocks have not opened for trading since last Friday. Going further down the list, the next largest exposure is from Pepsi…wait, what?? Yes! My friend’s beloved Pepsi collects 4.31% of its revenues from Russia and Ukraine. In Russia alone, the company has some 18 manufacturing facilities (only 2 facilities in Ukraine) which produce not only their iconic beverage, but also dairy products and snacks. Though the company does not expect the conflict to have a material impact on its overall performance, the impact will not be insignificant, for a company with $80 billion in annual revenues. That is most likely why the stock was down by -2.76% yesterday while its archrival Coca-Cola was only down by -0.97%. In 2012, Pepsi revealed the slogan The Best Drink Created Worldwide, and they meant it. In the days ahead, more and more economic impacts from the crisis will be exposed. Hopefully, the conflict will end soon, but unfortunately it appears that the economic damage is going to be felt for years to come.

YESTERDAY’S MARKETS

Stocks had a mixed close yesterday as the war and the economic sanctions deepened. The S&P500 fell by -0.24%, the Dow Jones Industrial Average gave up -0.49%, the Nasdaq Composite Index advanced by +0.41%, the Russell 2000 Index gained +0.35%, and the S&P500 ESG dropped by -0.26%. Bonds gained and 10-year Treasury yields fell by -14 basis points to 1.82%.  Cryptos rallied by +6.00% and Bitcoin jumped by +11.27% as traders hoped that the currency would be instrumental for money movement in the Russian/Ukrainian region.

NXT UP

• Markit Manufacturing PMI (Feb) is expected to come in at 57.5 in line with earlier flash estimates.
• ISM Manufacturing (Feb) may have increased to 58.0 from 57.6.
• Fed speakers include Bostic and Mester.
• This morning:  AutoZone, Horizon Therapeutics, and Builders FirstSource all beat on EPS and Revenues. Kohl’s and Target beat on EPS but fell short on Revenues. After the close: earnings from Nordstrom, First Solar, Ross Stores, salesforce.com, AMC Entertainment, and Plug Power.