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PepsiCo - revenue moves higher, volumes stumble

Pepsi's third-quarter revenue grew organically by 8.8% to $23.5bn, reflecting rising sales in all regions.

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Pepsi's third-quarter revenue grew organically by 8.8% to $23.5bn, reflecting rising sales in all regions. Sales growth was achieved through price hikes as beverage volumes remained flat and food volumes declined by 1.5%.

Underlying operating profit rose 12.1% to $4.0bn, helped by price hikes and cost-cutting measures.

Free cash flow has improved from $4.0bn to $5.2bn. Net debt has crept up from $33.7bn to $34.5bn since the beginning of the calendar year.

This financial year Pepsi expects to return around $7.7bn worth of cash to investors through dividends of $6.7bn and share buybacks of $1.0bn.

Full-year organic growth guidance has been maintained at 10.0%. Earnings per share (EPS) growth guidance has been upgraded by 1 percentage point to 13.0%, ignoring exchange rates.

The shares were broadly flat in pre-market trading.

View the latest Pepsi share price and how to deal

Our view

It's been another solid quarter for Pepsi, which saw its sales continue to grow at a time when consumers are really feeling the pinch.

The group's been leaving itself room to hit, and even surpass, its own guidance this year. The strong first half has seen Pepsi upgrade its full-year revenue growth guidance twice, from 6.0% to 10.0%. 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.

And despite inflationary headwinds pushing up costs, price hikes and cost management measures should allow underlying operating profit to grow at a faster pace than sales. That's a seriously impressive achievement in this challenging environment.

The longer-term picture looks good too, thanks to the diversity of Pepsi's top-quality brands. 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 $34.5bn. 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 are stalling. Because of this, we're curious to see if Pepsi keeps pushing through price hikes at the same pace as the year progresses.

Pepsi's valuation has come down in recent months, now trading slightly below its long-term average. But trading at 20.4 times forward earnings means there are still heavy expectations on its shoulders - meaning the shares could still be sensitive to stock market fluctuations or earnings disappointments. 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: 10th October 2023