The media has closely followed Britain’s tumultuous journey to leave the European Union since the country made the decision in a referendum in June 2016. On January 31, 2019, Brexit became official and the Great Britain is no longer legally part of the EU.
The full effects of this change on UK businesses are still unknown. For example, one of the main reasons cited for wanting to leave the EU was to escape its many regulations. In order to trade with EU countries, the UK government may end up complying with many of these regulations anyway, but the final ruling on each regulation has the potential to be a game-changer for many businesses.
As well as upending trade laws, Brexit also had a strong effect on the value of the country’s currency, the pound sterling. Since the June 2016 referendum, the pound has depreciated by around 7.8% against the US dollar, 5.9% against the Chinese yuan and 2.7% against the Japanese yen, has had a profound impact on UK international businesses which make a large proportion of their sales in foreign currencies. .
GlaxoSmithKline PLC (LSE: GSK) (GSK) is a British multinational pharmaceutical company. Based in London, it is one of the largest pharmaceutical companies in the world. It got its start after World War I, when its legacy companies consolidated and started developing drugs. Today, the company provides pharmaceuticals, vaccines and consumer healthcare products to customers around the world.
As of February 4, GlaxoSmithKline had a market capitalization of 89.01 billion pounds (approximately $116.04 million), a price/earnings ratio of 19.6, a cash/debt ratio of 0.13 and a return on capital of 59.92%. The stock price has risen 20% over the past year.
More than half of the company’s revenue comes from outside the UK. Vaccines are its most international products, with the US alone accounting for half of vaccine sales and other non-UK countries a quarter. As you can see in the table below, GSK has consistently increased its revenue and net profit over the past few years.
The constant currency will be a major tailwind for GlaxoSmithKline during the Brexit fallout. Being a major exporter, the company benefits greatly from the depreciation of the pound sterling. “The positive currency impact primarily reflects weakness in the British pound, particularly against the US dollar and the yen, partially offset by weakness in emerging market currencies,” reads the earnings report. the company’s third quarter of 2019.
The steady rise in GlaxoSmithKline’s currency could be amplified by the novel coronavirus (dubbed 2019-nCoV) that has emerged in China. In the past, panic over new diseases has driven consumers and investors to pump money into companies capable of developing the cure or vaccine. The company is already developing a vaccine against the novel virus and is also sharing its pandemic vaccine adjuvant platform technology through a collaboration with the Coalition for Epidemic Preparedness Innovations.
The company has taken a risk-dissolving approach to Brexit, focusing on strengthening its overseas supply chains to prepare them for regulatory issues. His contingency plan has been underway since the start of 2018, and he estimates the necessary changes could cost £70m over the two to three years following Brexit, plus an additional £50m a year in customs, duties and other customs charges. border charges.
Vodafone Group PLC (LSE:VOD) (VOD) is the fourth largest telecommunications provider in the world. Based in London, the company has more than 500 million mobile customers in 26 countries around the world. Although Huawei, Verizon (V) and AT&T (T) provide services in more countries, their customers are relatively concentrated in their home countries. On the other hand, Vodafone holds the dominant market place in many countries where it operates, especially in Europe and Africa. It is sometimes called the most powerful brand name in the UK
As of February 4, Vodafone had a market capitalization of 39.97 billion pounds, a price/earnings ratio of 15.04, a leverage ratio of 0.18 and a return on capital of 6.84%. Shares are up 7.97% over the past year.
Compared to other telecommunications giants, Vodafone has seen its growth slow, with revenue down 2.4% a year over the past three years despite an increase in the number of customers. European growth slowed somewhat to around one million net new mobile contracts per year, while international revenue grew 9% quarterly in the first half of fiscal 2020.
Since Vodafone is a company with core operations in many countries, it could face more headwinds due to post-Brexit regulations and travel restrictions. The value of the pound sterling is less relevant here as its depreciation against currencies such as the US dollar is offset by its appreciation against the currencies of many emerging markets in which it is the largest mobile service provider.
“If we get GDPR [General Data Protection Regulation] and the mishandling of data, if we get the visas wrong, the immigration part, this country misses an opportunity,” former Vodafone CEO Vittorio Colao said at a press conference in May 2018.
However, each country in which Vodafone operates is effectively a stand-alone business, so the individual segments are well prepared to deal with any changes in the way UK companies do business internationally. The company expects Brexit to have the biggest impact on its operations due to its impact on the macro economy in the UK, which could make consumers less willing to spend.
Diageo PLC (LSE:DGE) (DEO), a British multinational alcoholic drinks company headquartered in London, is another company with strong brand recognition and an international presence. Its brands include internationally renowned names such as Smirnoff, Guinness, Baileys, Johnnie Walker and Crown Royal. The company was the largest distiller in the world until China’s Kweichow Moutai overtook it in 2017.
As of February 4, Diageo had a market capitalization of 70.37 billion pounds, a price/earnings ratio of 23.52, a cash/debt ratio of 0.07 and a return on capital of 57.45%. Over the past year, the stock price has increased by 2.94%.
Benefiting from brand awareness around the world, Diageo’s sales have increased by 8.4% per year over the past three years.
Diageo is a truly global company, with the majority of its revenue coming from foreign countries. North America accounted for 34.9% of the company’s net sales in 2019, followed by Europe and Turkey at 22.9%, Asia-Pacific at 21.0%, Africa at 12.4% and Latin America and the Caribbean at 8.8%. With the highest percentage of sales coming from North America, Europe and Asia, Diageo’s earnings will only improve when the value of the pound depreciates against currencies in those regions.
However, constant currency tailwinds aside, Diageo is far less likely than GlaxoSmithKline or Vodafone to deal with Brexit-related changes. The company’s most recent earnings report includes a note stating that it expects all of its products to continue to trade duty-free. As a distiller, Diageo’s products are simple to understand, and the simpler the product, the less complex the regulatory risk. If a government imposes a tariff or two, the company’s profits will suffer, and any changes in taxes or regulations as a result of the reorganization will also have an impact. These factors are still largely unknown.
In short, Brexit is about to throw new variables on UK business, and the stronger its international presence, the more costly steps a business will have to take. GlaxoSmithKline is a good example of a company that can weather headwinds, thwarting rising international earnings at constant exchange rates. On the other hand, companies such as Diageo, which provide a class of easy-to-understand products, face less risk due to the nature of their business. Changes may be imminent, but the big question is how easy it will be for businesses to navigate the changes that affect them without breaking the bank.
Disclosure: The author does not hold any shares in any of the stocks mentioned.
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This article first appeared on GuruFocus.