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PepsiCo - growth across the board

PepsiCo - growth across the board

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No news or research item is a personal recommendation to deal. All investments can fall as well as rise in value so you could get back less than you invest.

PepsiCo Inc. Comm Stk US$ 0.0166

Sell: 179.28 | Buy: 179.29 | Change 1.95 (1.10%)
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Pepsi reported first quarter organic revenue growth of 13.7%, with net revenue of $16.2bn. That reflects growth across all divisions, with Latin America leading the way.

Underlying operating profit grew 6%, lagging revenue growth as inflation and planned investment weighed. Reported operating profit of $5.3bn includes a $3.3bn gain on the sale of several juice brands in the quarter, including Tropicana and Naked.

Despite higher-than-expected input cost inflation, management forecast full-year organic revenue to increase 8%, up from the 6% previously guided.

The shares were broadly flat 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 usually some way ahead of its more famous rival.

At the moment, Pepsi is doing what it can to offset some pretty nasty headwinds. These include big increases in commodity, distribution and packaging costs. So, while sales are impressive, the bottom line hasn't come along quite as far. Although any progress in the current environment is impressive.

The longer-term picture is helped by Pepsi's 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?

A laser-like focus on brand quality and margins, have kept profits slowly moving forwards over the year. A slight blip in Q4 of last year looks to be exactly what we hoped, short lived. Now the group's back on track with margin improvement in Q1 despite increased costs.

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.

Debt has crept up, although it's not too much of a concern at the moment, it's something to keep an eye on as interest rates increase.

Overall, we consider Pepsi's variety of brands and history of strong execution a real bonus. However, with the stock on a PE ratio above its long run average, only time will tell if the less focused, but perhaps more appealing business model can deliver the necessary results.

Pepsi key facts

  • Price/earnings ratio: 25.4
  • Ten year average forward Price/earnings ratio: 20.5
  • Prospective dividend yield (next 12 months): 2.7%

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 (percentage comparisons are organic)

PepsiCo Beverages North America saw broad based growth with net revenue of $5.4bn, up 13%. That was driven by double digit growth from brands such as Pepsi, Mountain Due and Rockstar. Margins improved 10.8% as the group focusses on more profitable growth, that helped operating profit rise 21% to $3.4bn.

Frito-Lay North America, which makes, markets, distributes and sells brands including Doritos, Cheetos, Ruffles and Lays, saw revenue rise 14%, with net revenue reaching $4.8bn. Higher commodity, transportation, investment, and marketing costs meant operating profit rose 3% to $1.3bn.

Quaker Foods North America posted net revenue of $713m, up 11%. Operating profits rose 6% to $159m as a range of higher costs weighed on performance.

The rest of the portfolio reported revenue growth, with all areas except Europe seeing operating profits rise. European performance was negatively impacted by impairment charges relating to the Russian portfolio.

There was a free cash outflow for the period of $693m (2021: $1.2bn outflow). Net debt at 19 March 2022 stood at $33.5bn.

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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.


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