Coke, Pepsi Join Companies Suspending Russia Operations

As the Russia-Ukraine conflict persists, leading beverage operators are opting to halt their businesses in Russia. In this context, citing the ongoing humanitarian crisis, wide-moat Coca-Cola KO is suspending its operations in Russia, a decision that follows similar actions by companies across a wide swathe of industries. Coke's exposure in Russia and Ukraine represents between 1% and 2% of revenue and operating income and includes a 21% stake in its regional bottler/distributor. We do not expect Coke's suspension of Russian operations to result in a change to our $59 fair value estimate, although we will continue to monitor this dynamic situation. We acknowledge that the conflict in Ukraine may increase pre-existing inflationary pressures, which management had estimated as a mid-single-digit headwind to cost of goods sold its recent fiscal 2022 guidance, and thus could pose an incremental challenge for the company. We believe Coke is well-positioned to navigate a heightened inflationary environment given its strong brand, innovation capabilities and marketing support, as well as greater operational flexibility achieved per its experience with the COVID-19 pandemic. Wide-moat Pepsi PEP will also suspend its nonessential operations in Russia, including its beverage business, capital spending and promotional activity, while continuing to sell milk/dairy and baby products. In 2021, Pepsi reported a meaningful $3.4 billion in revenue, or slightly more than 4% of its annual sales, from the country. Pepsi's Russian action may lead to a minimal reduction in our $154 fair value estimate, but we continue to believe that the company's pricing power, strength across core snack and beverage brands coupled with its differentiated packaging and marketing capabilities should support its competitive position.

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