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PepsiCo’s Q2 Results: Will the Growth Streak Continue?


Jul. 5 2019, Published 10:45 a.m. ET

PepsiCo’s second-quarter results

PepsiCo (PEP) is scheduled to announce its second-quarter results on July 9. The company’s second quarter ended on June 15. PepsiCo’s first-quarter revenues and EPS were better than expected in April. PepsiCo’s first-quarter revenues grew 2.6% to $12.9 billion and beat analysts’ estimate of $12.7 billion. Excluding the impact of structural headwinds and currency fluctuations, PepsiCo’s organic revenue growth was 5.2% in the first quarter.

PepsiCo’s productivity initiatives drove an improvement of 87 basis points in its gross margin to 55.9% and 120 basis points in its operating margin to 15.6% in the first quarter. PepsiCo’s adjusted EPS rose 1.0% to $0.97 compared to analysts’ forecast of $0.92.

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Second-quarter expectations

Analysts expect PepsiCo’s revenues to rise 2.1% to $16.4 billion in the second quarter. The company’s second-quarter adjusted EPS is expected to fall 6.8% to $1.50. In the first-quarter conference call, PepsiCo indicated that it doesn’t expect the strong organic growth rate delivered in the first quarter to continue in the rest of fiscal 2019.

Despite higher revenues, analysts expect PepsiCo’s adjusted EPS to fall in the second quarter due to commodity inflation, currency headwinds, and investments in growth initiatives.

PepsiCo’s segments

PepsiCo’s Frito-Lay North America division continued to deliver a strong performance in the first quarter. The division is expected to drive its second-quarter revenues. The division is PepsiCo’s second-largest division based on sales. The division contributes the most operating income. In the first quarter, the Frito-Lay North America division’s revenues grew 5.5% on a reported basis and 6.0% on an organic basis. The division’s top-line growth was a result of increased pricing and higher volumes.

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PepsiCo’s international business, mainly in developing and emerging markets, is also expected to boost the company’s overall growth. In the first quarter, PepsiCo’s Latin America division, Europe Sub-Saharan Africa division, and Asia, Middle East, and North Africa division delivered organic revenue growth of 10%, 8%, and 10%, respectively. However, the divisions’ revenue growth was impacted on a reported basis due to negative currency movements.

The PepsiCo Beverages North America division is the company’s largest segment by sales. The division generated revenue growth of 2.2% on a reported basis and organic revenue growth of 2.5%. The segment’s top-line growth was driven by higher net pricing. However, the segment’s volumes are a concern for the company. In particular, the carbonated soda beverage volumes have been weak.

In the first quarter, PepsiCo Beverages North America division’s volume fell 2% due to a 4% drop in carbonated soft drink volumes, partially offset by a 1% rise in non-carbonated beverage volumes. Weak soda volumes will likely continue due to the shift in consumers’ preference to healthier beverage choices like functional drinks, bottled water, and juices.

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Growth strategy

PepsiCo is focused on improving its revenues by fortifying its North America business. The company aims to strengthen its Frito-Lay North America division by innovating healthier snack options and investing in the division’s manufacturing capacity, brands, and go-to-market capabilities.

The company is trying to revamp its North America beverages business, which has been underperforming the market. PepsiCo is increasing its advertising and marketing spending on its core brands. The company is investing in the division’s go-to-market systems.

PepsiCo is accelerating its international expansion. The company already has a strong presence in over 200 countries. PepsiCo intends to scale its presence in key developing and emerging markets.

The company aims to improve its financial position through efficient cost management. PepsiCo is enhancing its productivity through many initiatives including further automation, investment in technology, and optimizing the manufacturing footprint.

With the help of strategic initiatives, PepsiCo aims to generate organic revenue growth of 4%–6% over the long term. The company also plans to deliver an expansion of 20 basis points–30 basis points in its adjusted operating margin over the long term.

Stock price movement and valuation

As of Thursday, PepsiCo stock has risen 21.3% on a year-to-date basis. The stock has outperformed the 10.0% rise in Coca-Cola (KO). PepsiCo has also outperformed the broader S&P 500, which has risen 19.5% this year.

Among the 23 analysts covering PepsiCo stock, 14 analysts recommended a “hold,” eight recommended a “buy,” and one recommended a “sell.” As of Thursday, the 12-month average target price for PepsiCo stock was $127.84, which implies a downside potential of ~5%.

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PepsiCo was trading at a 12-month forward PE ratio of 23.3x compared to Coca-Cola’s forward valuation multiple of 23.9x. Analysts expect PepsiCo’s revenues to rise 2.9% to $66.5 billion in fiscal 2019. The company’s adjusted EPS is expected to fall 2.3% to $5.53 in fiscal 2019 due to the impact of strategic investments and negative currency fluctuations. Despite the impressive organic growth rate in the first quarter, PepsiCo kept its guidance for fiscal 2019 unchanged. The company continues to expect organic revenue growth of 4%. PepsiCo expects it’s fiscal 2019 adjusted EPS to fall ~3.0% to $5.50.

Analysts expect Coca-Cola’s revenues to rise 9.1% to $34.8 billion in 2019. Coca-Cola’s adjusted EPS is expected to rise ~1.0% to $2.10.

Shareholders’ returns

PepsiCo and Coca-Cola are dividend aristocrats, which implies that they have increased their dividend for 25 consecutive years. Earlier this year, PepsiCo hiked its annual dividend per share 3.0% to $3.82. This year was the 47th consecutive year that PepsiCo raised its dividend. As of Thursday, PepsiCo’s dividend yield of 2.9% lagged Coca-Cola’s dividend yield of 3.1%.

PepsiCo plans to return $8 billion to shareholders in fiscal 2019, which includes ~$5 billion through dividends and $3 billion through share repurchases.


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