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Pepsi - earnings upgrade as beverage volumes rise

Third quarter underlying revenue rose 16% to $22bn thanks to double-digit growth in all segments bar...

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Third quarter underlying revenue rose 16% to $22bn thanks to double-digit growth in all segments bar the Asia Pacific, Australia and New Zealand and China region. This fed into an 14% increase in underlying operating profit.

The group now expects full year underlying revenue growth of 12%, up from guidance for 10%. Underlying earnings per share are now expected to rise 10%, up from the previous forecast of 8%.

Management's still planning to return $7.7bn to shareholders this year, made up of $6.2bn in dividend payments and $1.5bn in share buybacks.

The shares rose 2% in early trading.

View the latest Pepsi share price and how to deal

Our view

Pepsi's thriving in an environment that's challenging to say the least. The group's seen revenue move in the right direction and is even confident enough to up its guidance once again. Not something you'll see many others doing.

That's despite some nasty headwinds. These include big increases in commodity, distribution and packaging costs. So, while sales are impressive, it's been more difficult to grow the bottom line. Still, the group's managed to bump its profit growth outlook into the double-digits, a rarity at present.

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 rival 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. The group's back on track this year, with higher sales and cost management offsetting inflationary pressures.

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 and is trending in the right direction. Nevertheless, 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. Cash conversion's expected to be well north of 80% this year, so there's plenty in the tank to help pay the 2.9% dividend and fund the buyback. However, if recession fears become reality the higher-than-average valuation could come under some short-term pressure.

Pepsi key facts

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.

Third Quarter Results(underlying)

Frito-Lay North America reported revenue of $5.6bn, up 20%, driven by growth across all channels with particular strength among large format, foodservice and convenience and gas sellers. Operating profit increased 17% to $1.6bn despite inflationary pressure and a double-digit increase in advertising and marketing spend.

Revenue at Quaker Foods North America was up 16% to $713m, reflecting growth in all product categories. Lite snacks, cookies, oatmeal and ready-to-eat cereals were the strongest performers with high double-digit revenue growth. Together with cost saving efforts, this fed into a 15% increase in operating profit to $122m,

Pepsico Beverages North America saw revenue increase 13% to $6.6bn. Gatorade, Pepsi and Rockstar led the performance with double-digit revenue growth. Operating profit in this segment was 4% higher to $784m

The International business saw revenue rise 16%, driven by a 20% improvement in convenient foods and a 9% increase in beverages. Growth was led by Latin America, but the region saw a strong performance across all segments.

Free cash flow was $4.0bn, down from $4.4bn last year. Net debt was down from $34.3bn at year end to $32.5bn.

This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. It was correct as at the date of publication, and our views may have changed since then. 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 disclosure for more information.

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Written by
Laura Hoy
Laura Hoy
ESG Analyst

Laura is part of HL's ESG analysis team, working to offer research and analysis to help with sustainable decision making. She also works with other parts of the business to help integrate ESG.

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Article history
Published: 12th October 2022