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PepsiCo - revenue guidance raised

PepsiCo has reported organic revenue growth of 13%, to $20.2bn.

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PepsiCo has reported organic revenue growth of 13%, to $20.2bn. That reflected growth across all business segments. Underlying operating profit increased 10% to $2.1bn, impacted by higher operating costs.

The group now expects to grow organic revenue by 10%, ahead of the 8% previously guided. Underlying earnings per share, excluding the impact of exchange rates, is still expected to grow 8%. Total cash returns to shareholders for 2022 are expected around $7.7bn, with dividends of $6.2bn and share repurchases of $1.5bn.

The shares rose 1.4% in pre-market trading.

View the latest Pepsi share price and how to deal

Our view

Pepsi's come out with another positive quarter, with revenue growth across the board and demand holding up. So much so, even in this uncertain environment, management are confident enough to push revenue guidance higher. 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, 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 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 north of 80% this year, so there's plenty in the tank to help pay the 2.7% 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.

Second Quarter Results (organic growth)

PepsiCo Beverages North America posted 9% revenue growth to $6.1bn. Demand remained robust as Gatorade, Aquafina and LIFEWTR saw double digit growth. Pepsi, Mountain Dew and Rockstar all grew revenue in the mid-high single digits. Underlying operating profit fell 3% to $651m, as the division lapped an exception prior year and costs increased.

Frito-Lay North America saw revenue growth of 14%, to $5.2bn. That was driven by double digit growth across Doritos, Cheetos, and Ruffles. Underlying operating profit increased 5% to $1.4bn, reflecting higher costs and investment.

Quaker Foods North America grew revenue 18% to $675m. Underlying operating profit rose 5%, lagging revenue growth due to higher costs and increased marketing spend.

The international business reported revenue up 15%, with growth across all geographies. All geographies posted higher operating profit, except Europe where performance was impacted by impairment charges relating to the Russian portfolio.

Free cash flow of $382m was down from $1.0bn the prior year. Net debt decreased from $34.7bn to $33.9bn.

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
Matt Britzman
Equity Analyst

Matt is an Equity Analyst on the share research team, providing up-to-date research and analysis on individual companies and wider sectors.

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Article history
Published: 12th July 2022