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PepsiCo - revenue ahead of expectations

Sophie Lund-Yates, Equity Analyst | 16 April 2021 | A A A
PepsiCo - revenue ahead of expectations

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PepsiCo Inc. Comm Stk US$ 0.0166

Sell: 154.07 | Buy: 154.13 | Change -1.43 (-0.92%)
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Organic revenues were $14.8bn in the first quarter, rising 2.4%, excluding the effect of exchange rates and acquisitions. Operating profit rose 7% to $2.3bn, driven by lower corporate expenses and higher profits in PepsiCo Beverages North America and the Asia Pacific, Australia and New Zealand and China Region.

Management reiterated its guidance. They expect full year organic revenue to grow in the mid-single-digits, while a high-single-digit increase is expected in core earnings per share. The group also plans to return roughly $5.9bn to shareholders through dividend payments ($5.8bn) and share repurchases ($106m).

The shares were broadly flat following the announcement.

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Our view

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 around twice that of its more famous rival.

Like Coca-Cola, Pepsi has a diverse mix of top quality brands - 23 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 health 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. Pepsi had been looking to deliver 4-6% annual revenue growth and a 0.2-0.3 percentage point improvement in margins over the long term. We thought COVID-19 would knock these targets back a bit, but management is still expecting mid-single digits revenue growth this year. Hopefully that will see Pepsi build on 49 consecutive years of dividend growth. Remember no dividend's guaranteed and this should not be seen as a guide to the future.

Margins are being squeezed by weather related disruption and international acquisitions though. And uncertain COVID costs mean margin progression could be sluggish. Coupled with the fact debt's crept up and free cash flow was negative in the first quarter, the picture's not totally rosy. None of this is the end of the world - in fact we're supportive of the acquisition strategy - but it is something to be mindful of. Further shocks to the corporate purse could see returns to shareholders trimmed.

It's also worth considering Pepsi's business model, which varies considerably by region. It'll manufacture products in some markets, 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.

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

Pepsi key facts

  • Current 12m forward P/E ratio: 23.1
  • 10 year average 12m forward P/E ratio: 19.5
  • Prospective dividend yield (next 12 months): 3.1%

All ratios are sourced from Refinitiv. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn't be looked at on their own - it's important to understand the big picture.

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First Quarter Results (all profits are core, revenue growth is organic)

Sales at Frito-Lay North America rose 3% to $4.2bn, driven entirely by increased prices as volumes declined. Operating profits of $1.3bn were 2% ahead of last year. The division benefited from refreshed product offerings, and brands like Ruffles and Doritos performed well. Weather related disruptions held operating margins back.

Quaker Foods North America grew revenue by 1% to $646m, as pricing increases offset volume declines. Operating profits fell $1m, to $150m.

Operating profits at PepsiCo Beverages North America were up 23% to £371m. That reflected a $236m increase in revenue, to $5.1bn. Increases were driven by increased market share in carbonated soft drinks, teas, juices and sparkling water. Key brands bubly and Starbucks grew net revenue by double-digit percentages.

Revenue in Latin America fell 3% to $1.2bn and profits declined 1% to $220m. Europe saw revenue decline slightly to $1.8bn, and operating profits for the segment were $142m, compared to $154 last year.

Operating profits in Africa, Middle East and South Asia were up from $138m to $140m, although revenues fell 1% to $883m. Asia Pacific, Australia and New Zealand and China Region reported an 18% revenue increase to $944m and profits for the division rose 39% to $208m.

Net debt at the end of the quarter rose to $37.0bn, up from $34.6bn at the end of 2020.

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This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. Unless otherwise stated estimates, including prospective yields, are a consensus of analyst forecasts provided by Refinitiv. 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.