PepsiCo Inc. (PEP) Comm Stk US$ 0.0166 (Crest Depository Interest)
HL comment (13 July 2020)
Pepsi's underlying second quarter revenue fell 0.3% to $15.9bn. Core earnings per share fell 11% to $1.32.
Given the economic uncertainty Pepsi is not providing guidance for the full year, but does intend to maintain both dividends and share buybacks.
The shares rose 1.8% in pre-market trading.
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 almost twice that of its more famous rival.
Like Coca-Cola, Pepsi has a diverse mix of top quality brands - 22 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?
Recent years have seen a concerted effort to focus on Pepsi's health credentials. That might seem a bit odd for a company whose main business is crisps and soft drinks. But consider for a moment that Pepsi MAX has been the focus of all Pepsi advertising in the UK since 2005, and perhaps it's not so surprising.
A laser-like focus on brand quality and margins, have kept profits slowly moving forwards and management reckons there's more in the tank. Pepsi had been looking to deliver 4-6% annual revenue growth and a 0.2-0.3 percentage point improvement in margins over the long term. COVID-19 will undoubtedly knock these targets back a bit, but management should be able to pick up broadly where they left off once everything returns to normal. Hopefully that will see Pepsi build on 48 consecutive years of dividend growth - a formidable record even if it isn't repeated in the decades ahead.
It's worth keeping half an eye on Pepsi's business model though, which varies considerably by region. It'll manufacture products in some markets, while 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 is starting to creep up though, and as it stands net debt is 2.8 times last year's cash profits. Pepsi is strong company and can generate a lot of cash, but as debt grows management's room for manoeuvre could get constrained. We're not worried, but we're keeping an eye on it.
Overall we consider Pepsi's variety of brands and focus on healthier options clear attractions. However with the stock on a PE ratio well above its long run average, only time will tell if the less focussed, but perhaps more forward thinking business model can deliver the necessary results in the years ahead.
Pepsi key facts
- Current 12m forward P/E ratio: 23.9
- 10 year average 12m forward P/E ratio: 18.8
- Prospective yield: 3.1%
We've introduced this section in response to recent survey feedback.
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
Frito-Lay North America grew underlying sales 6% to $4.3bn, reflecting the combination of higher prices and a 3% increase in volumes. Core operating profit rose 2% to $1.3bn, and COVID-19 related costs reduced operating profit growth by around 10 percentage points.
Quaker Foods North America grew revenue by 23% to $664m as volume increased 26%. Growth was broad based across the portfolio, although oatmeal, Aunt Jemima Syrup and ready to eat cereals were stand out performers. Core operating profit rose 55% to $196m as revenue growth and productivity savings were partially offset by higher costs, including a 6 percentage point reduction from COVID-19.
Pepsi Beverages North America saw revenue fall 7% to $5.0bn, reflecting a 10% fall in volume which was led by carbonated drinks. Core operating profit fell 37% to $440m, which management attributed to higher costs and a 20 percentage point impact from COVID-19.
Revenue in Latin America was flat at $1.6bn, and snacks volumes were flat while beverage volumes fell 9%. Core operating profit fell 8% to $223m, reflecting an 11 percentage point impact from COVID-19.
In Europe revenue fell 2.5% to $2.7bn despite 2% volume growth in both snacks and beverages as pricing weakened. Core operating profit fell 7% to $359m despite productivity savings as COVID-19 resulted in an 11 percentage point charge.
Asia Pacific, Australia and New Zealand and China Region (APAC) revenue rose 15% to $763m and core operating profit rose 31% to $192m. Africa, Middle East and South Asia (AMESA) revenue fell 7% to $983m and core operating profit fell 9% to 221m.
Net debt at the end of the quarter rose to $35.9bn, up from $26.3bn at the end of 2019. Over the six month period Pepsi generated $274m in free cash.
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