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Brexit Shakes Things Up for These International Companies

The media has closely followed Britain's tumultuous journey to leave the European Union ever since the country made the decision in a June 2016 referendum. On Jan. 31, 2019, Brexit became official, and Britain is legally no longer part of the EU.

The full effects of this change on British companies is still unknown. For example, one of the biggest reasons cited for wanting to leave the EU was to escape its many regulations. In order to trade with EU countries, the British government may end up conforming to many of those regulations anyway, but the final decision on each regulation has the potential to change the game for many companies.

In addition to shaking up the trade laws, Brexit has also had a strong effect on the value of the country's currency, the British pound. Since the June 2016 referendum, the pound has depreciated approximately 7.8% against the U.S. dollar, 5.9% against the Chinese yuan and 2.7% against the Japanese yen, which has had profound effects on British international companies that conduct much of their sales in foreign currencies.


GlaxoSmithKline PLC (LSE:GSK) (GSK) is a British multinational pharmaceutical company. Headquartered in London, it is one of the most prominent pharmaceutical companies in the world. It got its start following the first World War, when its legacy companies consolidated and began developing drugs. In the present day, the company provides pharmaceuticals, vaccines and consumer health care products to customers around the world.

As of Feb. 4, GlaxoSmithKline has a market cap 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 share price has increased by 20% over the past year.


More than half of the company's revenue comes from outside of the U.K. Vaccines are its most international products, with the U.S. alone accounting for half of vaccine sales and other non-U.K. countries accounting for a fourth. As you can see in the chart below, GSK has consistently increased its revenue and net income over the past several years.


Constant currency will be a major tailwind for GlaxoSmithKline during the fallout from Brexit. Since it is a heavy exporter, the company benefits greatly from the depreciation of the British pound. "The positive currency impact primarily reflected the weakness of Sterling, particularly against the US$ and Yen, partly offset by weakness in emerging market currencies," reads the company's third-quarter 2019 earnings report.

GlaxoSmithKline's constant currency boost may be magnified by the new coronavirus (dubbed 2019-nCoV) that has emerged in China. In the past, panic over new diseases has resulted in both consumers and investors pouring money into the companies that can develop the cure or the vaccine. The company is already in the process of developing a vaccine for the new virus, and it 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 building up its foreign supply chains to prepare them for regulatory issues. Its contingency plan has been underway since the beginning of 2018, and it estimates that the necessary changes could cost 70 million pounds over the two to three years following Brexit, along with an additional 50 million pounds per year in customs, duties and other cross-border costs.


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 worldwide. Although Huawei, Verizon (V) and AT&T (T) provide services in more countries, their customers are relatively concentrated in their countries of origin. On the other hand, Vodafone holds the dominant market spot in many of the countries it operates in, particularly in Europe and Africa. It is sometimes called the most powerful brand name in the U.K.

As of Feb. 4, Vodafone has a market cap of 39.97 billion pounds, a price-earnings ratio of 15.04, a cash-debt ratio of 0.18 and a return on capital of 6.84%. Shares have increased 7.97% over the past year.


Compared to the other telecommunications giants, Vodafone has seen its growth slow, with revenue declining 2.4% per year over the past three years despite the number of customers increasing. European growth has slowed somewhat to approximately one million net new mobile contracts per year, while international revenues have grown 9% per quarter during the first half of fiscal 2020.


Since Vodafone is a company with primary operations in many countries, it may face more headwinds from post-Brexit regulations and travel restrictions. The value of the British pound is less relevant here because its depreciation against currencies such as the U.S. dollar is counteracted by its appreciation against currencies in many of the emerging markets in which it is the largest mobile services provider.

"If we get GDPR [General Data Protection Regulation] and data treatment wrong, if we get the visas wrong, the immigration part, this country misses an opportunity," former Vodafone CEO Vittorio Colao said in a press conference in May 2018.

However, each country that Vodafone operates in is effectively a standalone business, so the individual segments are well prepared to face any changes in how British companies do business internationally. The company expects that the most impact Brexit will have on its operations will be due to its impact on the macro economy in the U.K., which may make consumers less willing to spend.


Another company with strong brand recognition and international presence is Diageo PLC (LSE:DGE) (DEO), a British multinational alcoholic beverages company headquartered in London. Its brands include internationally popular 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 surpassed it in 2017.

As of Feb. 4, Diageo has a market cap 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, share prices have increased by 2.94%.


Benefitting from brand-name recognition around the world, Diageo's revenue has grown 8.4% per year over the past three years.


Diageo is a truly global company, with the majority of its sales revenue coming from foreign countries. North America accounted for 34.9% of the company's 2019 net sales, 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 profits will only improve when the value of the pound depreciates against the currencies in these regions.

However, aside from constant currency tailwinds, Diageo is far less likely than GlaxoSmithKline or Vodafone to face Brexit-related changes. The company's most recent earnings report includes a note that it expects all of its goods to continue trading tariff-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 slaps on a tariff or two, the company's profits will suffer, and any changes to taxes or regulations in the wake of the reorganization will also have an impact. These factors are still largely unknown.


In short, Brexit is set to throw new variables at British companies, and the stronger its international presence, the more a company will have to jump through costly hoops. GlaxoSmithKline is a good example of a company that may face headwinds, counteracting the boost in international profits on a constant currency basis. On the other hand, companies such as Diageo, which provide one class of easy-to-understand products, face fewer risks due to the nature of their businesses. Changes may be imminent, but the big question is how easy it will be for companies to navigate the changes that affect them without breaking the bank.

Disclosure: Author owns no shares in any of the stocks mentioned.

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This article first appeared on GuruFocus.