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PepsiCo - Third quarter sales fizz

Nicholas Hyett | 3 October 2019 | A A A
PepsiCo - Third quarter sales fizz

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PepsiCo Inc. Comm Stk US$ 0.0166

Sell: 164.71 | Buy: 164.74 | Change 4.09 (2.55%)
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Pepsi delivered a healthy first quarter on the revenue front, with sales rising 4.3% to $17.2bn - ahead of the year-to-date and market expectations. Quarterly operating profits of $2.9bn also beat analyst forecasts, despite rising less than 1%.

Full year revenues now look set to come in ahead of previous expectations.

The shares rose 2.3% in pre-market trading.

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Our view

As the owner of the world's second largest cola brand, at first glance Pepsi looks like Coca-Cola writ small. But Pepsi's annual sales are actually twice that of its more famous rival.

Like Coca-Cola, Pepsi has a diverse mix of top quality brands - 22 of which generate $1bn or more of sales a year. But unlike Coca-Cola, it doesn't limit itself to soft drinks. PepsiCo's products include snack brands such as Walkers crisps and Doritos, and some more unexpected names - Quaker Oats with your fizzy drink?

Recent years have seen a concerted effort to focus on Pepsi's healthy credentials. That might seem a bit odd for a company whose main business is crisps and soft drinks. But consider for a moment that Pepsi MAX has been the focus of all Pepsi advertising in the UK since 2005, and perhaps it's not so surprising.

A laser-like focus on brand quality and margins, have kept profits slowly moving forwards and management reckons there's more in the tank. Pepsi's looking to deliver 4-6% annual revenue growth and a 0.2-0.3 percentage point improvement in margins over the long term. All being well, the combination of revenue and margin growth should be very good news for profits.

Hopefully that will see Pepsi build on 46 consecutive years of dividend growth - a formidable record even if it isn't repeated in the decades ahead. PepsiCo currently offers a prospective yield of 3%, not an indicator of future returns.

It's worth keeping half an eye on Pepsi's business model though, which varies considerably by region. It'll manufacture products in some markets, while in others it hands over almost complete control to a licencing partner - such as Britvic in the UK. On the one hand that makes Pepsi more capital intensive thanks to investments in factories and production equipment, increasing risk. But it's also allowed manufacturing processes to benefit from scale, with $1bn in cost savings planned for every year out to 2023.

We consider Pepsi's variety of brands and focus on healthier options clear attractions. However with the stock on a PE ratio well above its long run average, only time will tell if the less focussed, but perhaps more forward thinking business model can deliver the necessary results in the years ahead.

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Third Quarter Results

The Frito-Lay North America business (23.9% of quarterly group revenue) remains the standout performer for Pepsi, with 5.5% organic revenue growth. That reflects a combination of volume and price increases. The division remains by far the largest contributor to group profit at $1.3bn.

The other US businessesQuaker Foods North America (3.4% of revenue) and Pepsi Beverages North America (32.8% of revenue) both saw volumes fall 1%. Price growth meant overall organic sales rose 1% and 3% respectively, however that was not enough to keep operating profits moving forward in either division.

Latin America (11.1% of revenue) saw a strong volume performance in beverages more than offset weaker snack sales, with overall revenues up 4%. Europe & Sub-Saharan Africa (19.5% of revenue) delivered the same level of organic revenue growth despite a slight decline in beverage volumes.

The group's smallest region, Asia, Middle East & North Africa (9.4% of revenue), saw sales rise 9% as volumes surged in both snacks (+8%) and beverages (+4%). Operating profits rose 14.8% to $357m.

Net debt at the end of the quarter stood at $27.1bn, up from $23.6bn at the end of the last financial year. That reflects the acquisition of Soda-Stream earlier in the year as well as increased investment.

The group believes it may now exceed its 4% organic revenue growth target. However, all other guidance remains unchanged.

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Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Thomson Reuters. These estimates are not a reliable indicator of future performance. Yields are variable and not guaranteed. Investments rise and fall in value so investors could make a loss.

This article is not advice or a recommendation to buy, sell or hold any investment. No view is given on the present or future value or price of any investment, and investors should form their own view on any proposed investment. This article has not been prepared in accordance with legal requirements designed to promote the independence of investment research and is considered a marketing communication. Non-independent research is not subject to FCA rules prohibiting dealing ahead of research, however HL has put controls in place (including dealing restrictions, physical and information barriers) to manage potential conflicts of interest presented by such dealing. Please see our full non-independent research for more information.