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PepsiCo - revenue guidance raised again

Pepsi's second-quarter revenue of $22.3bn was driven by organic growth of 13.0%, reflecting rising sales in all regions.

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Pepsi's second-quarter revenue of $22.3bn was driven by organic growth of 13.0%, reflecting rising sales in all regions. Sales growth was achieved through price hikes as food and beverage volumes fell 3% and 1% respectively.

Underlying operating profit rose 15% to $3.9bn, ignoring the impact of exchange rates. This was driven mainly by price hikes and productivity savings which helped improve the operating margin by 6.1 percentage points.

Free cash flow improved slightly from $604m to $628m, as Pepsi paid suppliers slower this year. Net debt increased by $3.4bn to $37.2bn.

Full-year organic revenue guidance has been upgraded for the second time this year, now expected to rise by 10% compared to previous guidance for 8% growth.

The shares were up 2.2% in pre-market trading.

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Our view

It's been another great quarter for Pepsi, which saw its top line bubble up by double digits at a time when consumers are really feeling the pinch.

Despite inflationary headwinds pushing up costs, improved sales and other cost management measures have helped keep underlying operating profit growing at a faster pace. That's a seriously impressive achievement in this challenging environment.

Even with rising costs set to persist, the strong first half has seen Pepsi upgrade its full-year revenue guidance for a second time this year. With a proven track record of delivering, we wouldn't bet against them. Its ability to thrive can be credited to a laser-like focus on brand quality.

The longer-term picture looks good too, thanks to the diversity of Pepsi's top-quality brands - 23 of which generate $1bn or more in sales a year. But unlike rival Coca-Cola, it doesn't limit itself to soft drinks. Pepsi's products include snack brands such as Walkers crisps and Doritos, and some more unexpected names - Quaker Oats with your fizzy drink?

It's also worth considering Pepsi's business model, which varies considerably by region. It'll manufacture products in some markets, and in others, it hands over almost complete control to a licensing 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.

Net debt remains high, coming in at around $37bn. Although it's not too much of a concern at the moment, it's higher than we'd like to see and it's certainly something we'll be keeping our eye on with interest rates remaining at high levels.

Overall, we consider Pepsi's variety of brands and history of strong execution a real bonus. But we're wary that both food and beverage volumes fell slightly this quarter. Because of this, we're curious to see if Pepsi keeps pushing through price hikes at the same pace as the year progresses.

With Pepsi trading above its long-term average on a price-to-earnings basis, there are heavy expectations on its shoulders - increasing the risks of ups and downs. Recently upgraded guidance signals management's confidence in its ability to deliver but remember, nothing is guaranteed.

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.

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
Aarin Chiekrie
Aarin Chiekrie
Equity Analyst

Aarin is a member of the Equity Research team. Alongside our other analysts, he provides regular research and analysis on individual companies and wider sectors. Having a keen interest in global economics, he knows how macro-events can impact individual companies.

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Article history
Published: 13th July 2023