Industry Focus takes a look at such iconic American brands such as Coca-Cola (NYSE:KO), McDonald's (NYSE:MCD), Wal-Mart (NYSE:WMT) and more, to find out just how big a role their international holdings really play in their overall corporate operations.
It's no secret that you can get a Coke just about anywhere on Earth, but what does that mean for investors? How big a problem are currency fluctuations? Are corporate profits "trapped" overseas by U.S. tax laws? All this and more on this consumer goods edition of Industry Focus.
A full transcript follows the video.
Sean O'Reilly: We're leaving America and heading overseas in order to buy American brands, on this consumer goods edition of Industry Focus.
Greetings Fools, and happy St. Patrick's Day! I am Sean O'Reilly, with the one and only Vincent O'Shen, and we are joining you from ... he's laughing at me! We're joining you from Fool HQ in beautiful Alexandria, Virginia. How are you doing, Vince?
Vincent Shen: Doing very well. A happy St. Paddy's Day.
O'Reilly: Thank you! You like what I did with your name there?
Shen: Yes, and the listeners can't see, but Sean is dressed very appropriately for the holiday today.
O'Reilly: I've got my green on. Nobody can pinch me.
We are recording here on St. Patrick's Day, and we wanted to put together a show about American companies going overseas, and which ones are doing it successfully, which ones are doing most of their business overseas ... who is first up here, Vince?
Shen: Our first candidate, a little bit related to our fast casual episode last week, is McDonald's. A bigger player, obviously, but interestingly enough they have always been thought of as the quintessential American company.
O'Reilly: The quintessential, yes.
Shen: And only 1/3 of their sales are based in the U.S. now. They've certainly gone global.
O'Reilly: When we talk about Chipotle (NYSE:CMG) beating them up here in the United States, it might not matter.
Shen: Well, yes. It just depends on your viewpoint there, because Chipotle's international expansion has been very slow, steady, gradual. They're still testing the waters, seeing if it's really going to work for them.
McDonald's has been around much longer. They have 22,000 international locations, so they definitely have that little boost, compared to their U.S. comps.
O'Reilly: I know we keep talking up the advent of fast casual here and everything, but I do want to admit, I went to Beijing in late 2009 going into 2010, and McDonald's is how I survived!
Shen: Yes, sometimes local food is not for everybody. When I was traveling, myself, I had maybe once or twice a Big Mac.
O'Reilly: It's nice to get a little taste of home when you're abroad.
Shen: Taste of home, exactly. That consistency, you can't beat it.
Yes, they have 22,000 international locations, about 14,000 U.S. locations. They operate in 100 countries.
O'Reilly: The world only has 190 countries, so that's a lot of the planet.
Shen: It's significant, for sure.
O'Reilly: This is The Motley Fool, we try to get investing ... how much money do they make abroad, profitability wise? It's a big chunk of their earnings, right?
Shen: Yes, exactly. A third of U.S. sales, so I think it's about $18 billion for their international revenues.
Some of the issues that they're running into now as a result of doing so much business abroad is, you'll see a lot of these companies that have been reporting earnings that are multinational businesses, they all have the same disclaimer, so to speak, on their earnings: "We are being significantly affected by currency fluctuations."
O'Reilly: Yes, the dollar is kind of up a lot!
Shen: Yes. The dollar index is up 20% in the past years, against the basket of currencies.
O'Reilly: The euro is at its lowest level to the dollar since 2003 or something.
Shen: Yes, very, very low levels. For McDonald's personally, for the year, they're seeing currency having about a 35-40 cent impact on their EPS.
O'Reilly: That's a lot.
Shen: It's significant, for sure.
O'Reilly: That's a lot. Who's up next here? We've got your friend and mine, Procter & Gamble (NYSE:PG).
Shen: Correct. Correct. Procter & Gamble, kind of similar. At their level, 35% of their sales come from the U.S. They're doing business in 180 countries.
O'Reilly: This is truly a global company.
Shen: Yes, absolutely.
O'Reilly: 180 countries. They probably don't operate in, what, North Korea, Cuba, and that's it?
Shen: Just think about the brands that they have, and you can imagine that some of those companies -- like Gillette and things along those lines -- their market shares are very impressive. Gillette has a 70% worldwide market share for razor products, so you can imagine that you're going to find a Gillette razor pretty much in every corner of the world.
Otherwise, other than the U.S., which has 35% of the sales, no other country makes up more than 10%, so they're pretty well diversified in that regard.
O'Reilly: Including the United States?
Shen: No, excluding the United States.
O'Reilly: Oh, OK.
Shen: The U.S. has 35%, and then all the other countries that they are ...
O'Reilly: It's 65, but then no other country makes up ...
Shen: Exactly. They have about $83 billion in annual revenue, and they have also run into similar issues with their currency effects, where they think it's going to have a $1.4 billion after tax effect on earnings. The CFO recently said during their earnings call that this is going to be the most significant fiscal year currency impact they have ever incurred at the company.
O'Reilly: That's staggering.
Shen: It's good for these companies to find growth, to expand abroad. A lot of consumer companies are heading in that direction, but there are obviously hiccups that happen along the way.
O'Reilly: Right. I can only assume that the pendulum is going to swing the other way at some point, when Europe's done doing QE and all that good stuff that's killing the euro right now.
But looking at the global stature of Procter & Gamble ... 180 countries. I'm actually kind of surprised. I'm sure you remember Warren Buffett's Berkshire Hathaway (NYSE:BRK-A) (NYSE:BRK-B), they swapped the shares that they owned in Procter & Gamble for Procter & Gamble's Energizer subsidiary. They own the battery maker now.
Shen: Oh, OK.
O'Reilly: I think it's Energizer. If you want to take advantage of the advent of a global middle class, there are only a handful of companies that are perfectly positioned for that. Everybody needs Tide, you know what I mean?
Shen: That's true. Another one that's truly, truly global, and I think this one is really something you will find in every corner of the world, is Coca-Cola.
Shen: In their 10-K they say they operate about 200 countries and territories; pretty much everywhere you can go.
O'Reilly: If you had to pick a company on this list that owns Planet Earth, it would probably be Coca-Cola.
Shen: Of course.
O'Reilly: I went to the Coke museum in Atlanta a number of years ago. They had this global video, and they showed a Coke delivery truck driving by the Pyramids of Giza.
Shen: Oh, really?
O'Reilly: I was like, "Oh my gosh!"
Shen: That's going to happen.
O'Reilly: If only the Ancient Egyptians could see what we're doing!
Shen: Coca-Cola, 40% of their revenue is international, so not quite as heavily for them compared to some of the other companies we mentioned.
I wanted to go back to something you said earlier; the fact that it's really hard to forecast some of these currency fluctuations, so a lot of these management teams are saying now that they're reducing their guidance, taking a more conservative stance.
They don't know where things are going to go, because a lot of people expected the dollar to appreciate. They just did not expect it to do so at such a rapid pace.
O'Reilly: This far, this fast.
Shen: Exactly. Some of Wall Street is projecting that the euro and yen are going to continue to decline, maybe even another 20% against the dollar by 2017. It just gives you an idea ...
O'Reilly: If this is the status quo, I'm kind of surprised these companies aren't selling off more!
Shen: Well, if you're a multinational company, it's hitting you just like it's hitting everybody else.
O'Reilly: Cost of doing business.
O'Reilly: A worthy component of this list is also your friend and mine, Wal-Mart.
Shen: Yes. Wal-Mart does 59% of their sales in the United States. For them though, their U.S. segment is the biggest driver of their profits. It has the best margins for them, essentially.
They're not quite as present globally. They're in 26 countries, it makes up about 30% of their sales -- which is still a very significant $137 billion of course. They run about 6,107 locations. Their biggest country is Mexico.
O'Reilly: Wow. I'm trying to think back. With Wal-Mart, I'm pretty sure they've been trying to get it right overseas, and it is not surprising to me at all that a good chunk of it -- 41% of the sales -- comes from overseas, but the profits are still here.
O'Reilly: It's really hard culturally, to get Wal-Mart, which is built for America; huge stores ...
Shen: Absolutely. They've run into some issues. The whole business model revolving around the rock-bottom prices, the large stores having everything in one place for lower/middle-income consumers ...
But they also need their supply chain and their distribution system to work flawlessly, for that to really be profitable for them. They've run into issues in certain countries, where things simply do not operate the same way.
In Germany they had to shutter a lot of their locations and take a pretty significant writedown due to the fact the labor laws there and some of the other regulations simply did not allow Wal-Mart to take advantage of its core operating strengths.
O'Reilly: Even if Wal-Mart had been able to get over all those issues you just mentioned, you can't snap your fingers and get the distribution system that Wal-Mart has here in the United States, up and running overnight in China or Europe ... it just doesn't work.
Shen: Exactly. A big competitor for Wal-Mart here, Target (NYSE:TGT), is something I wanted to bring up. They're essentially a U.S. company now.
O'Reilly: They just threw in the towel on Canada.
Shen: Exactly. It's an example of, not all these expansions go well. In January they announced they were going to shutter 130 or so locations in Canada.
O'Reilly: All of them. All the stores.
Shen: Just exiting the market completely after only opening the first store, maybe a few years ago. As a result, they had to take a $5.4 billion pre-tax loss. The issue there was too much, too fast. They took over discount retailer Zellers, which is a chain up in Canada.
O'Reilly: That chain wasn't doing well.
Shen: The quality of the locations, the quality of the stores themselves, they were running into a lot of issues keeping shelves stocked, getting price points where they'd be attractive, and consumers were going in initially to the deep discounts, but they weren't coming back so they had to shutter their international locations in Canada.
O'Reilly: We just ran down this list of these huge companies that are household names here in the United States, but have a huge presence overseas; McDonalds, Procter & Gamble ... How much money have they invested overseas? How much money do we have sitting overseas?
You hear the T word thrown around a lot: Trillion. Just massive amounts of money that Apple (NASDAQ:AAPL) has overseas, and all these companies.
Shen: Sure. That's quite a big regulatory tax law issue that these companies are facing now, because most of these countries where they operate in their international regions, they're already being taxed at that local level. As a result, they don't want to get hit by U.S. corporate taxes again, if they repatriate the money.
It's estimated there's about $2 trillion of earnings that are left in foreign controlled subsidiaries, in order to avoid some of those tax implications.
O'Reilly: That's a lot of money.
O'Reilly: That is a two, followed by 12 zeroes!
Shen: Yes. It's very significant. Apple is one of the big examples, but Coca-Cola too. They have about $33 billion of untaxed foreign earnings, and of their cash and marketable securities, about 90% of it -- $20 billion -- is all held abroad.
O'Reilly: That's amazing.
Shen: It's one of the big issues right now. Whether that's going to change, whether the government's going to enact a tax holiday so these companies can repatriate these earnings at a lower rate ...
O'Reilly: Bring the money home, yes.
Shen: It involves the political parties, so as a result it's going to be very complicated.
O'Reilly: I wonder what discussions happen in these board rooms, as globalization continues in this century, if all the growth is going to be outside the United States, if these companies just wouldn't want to keep it overseas, and just invest in operations and all that stuff.
Shen: Yes. I think some of these companies will see ways of maximizing value for their shareholders in ways that, like you say, shift focus to international markets. A good example of that from 2008 was with Philip Morris (NYSE:PM), where they basically spun off the international segment.
O'Reilly: The international, to give investors an opportunity get all the international growth.
Shen: Exactly. That's where the best growth was. They wanted to avoid some of the regulatory issues they were running into domestically, so that's a good example of some potentials.
Wal-Mart, there have been rumors about potentially spinning off their Sam's Club segment, but also certain international segments as well. That is a way some of these companies are approaching the matter now, that their businesses might not necessarily be majority based in the United States any longer.
O'Reilly: It's a brave new world! Very cool. Thank you for your time, Vincent, and once again happy St. Patrick's Day!
Shen: Happy St. Paddy's Day!
O'Reilly: We will see you later.
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Sean O'Reilly has no position in any stocks mentioned. Vincent Shen has no position in any stocks mentioned. The Motley Fool recommends Apple, Berkshire Hathaway, Chipotle Mexican Grill, Coca-Cola, McDonald's, and Procter & Gamble. The Motley Fool owns shares of Apple, Berkshire Hathaway, and Chipotle Mexican Grill and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.