Citi Is Lowering Estimates At Pepsi And Coca-Cola Enterprises Because Of This

In a report published Thursday, Citi analysts Wendy Nicholson, Peter J Chun and Alexandra Crouse lowered its estimates for two major U.S. beverages companies, Coca-Cola Enterprises Inc CCE and Pepsico, Inc. PEP, because of foreign exchange.

As the U.S. dollar continues to strengthen against numerous foreign currencies (particularly against the euro and, to a lesser extent, other European currencies like the British pound, the Russian ruble, the Norwegian krone, and Swedish krona), Citi’s F/X forecasts, updated on December 16, 2014, needed a new revision.

Coca-Cola Enterprises generates 100 percent of its revenue in Western Europe. Below are the specific changes to the F/X and EPS forecasts.

“As of December 16, 2014, we had modeled the f/x impact on CCE’s sales to be 8% in 1Q15, 8% in 2Q15, 6% in 3Q15, and 2% in 4Q15. Given current exchange rates (and assuming they do not move further in any direction from current levels), we now model the f/x impact on CCE’s sales to be 9% in 1Q15, 11% in 2Q15, 10% in 3Q15, and 8% in 4Q15. Based on our new 2016 EPS estimate of $2.98, the market multiple of 15x on 2016 S&P 500 earnings and our target valuation for CCE to trade at a 5% premium to the market, we maintain our $46 TP.”

Coca-Cola Enterprises recently traded around $42.51.

Pepsico was also impacted by the strengthening dollar, especially by F/X pressure in Russia. EPS estimates were trimmed as shown below.

“As of December 16, 2014, we had modeled the f/x impact on PEP’s sales to be 4% in 1Q15, 4% in 2Q15, 4% in 3Q15, and 1% in 4Q15. Given current exchange rates (and assuming they do not move further in any direction from current levels), we now model the f/x impact on PEP’s sales to be 6% in 1Q15, 6% in 2Q15, 5% in 3Q15, and 3% in 4Q15. Based on our new 2016 EPS estimate of $5.07, the market multiple of 15x on 2016 S&P 500 earnings and our target valuation for PEP to trade at a 30% premium to the market, we maintain our $100 TP.”

Pepsico recently traded around $94.57.

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