PepsiCo Inc. (PEP) Comm Stk US$ 0.0166 (Crest Depository Interest)
HL comment (13 July 2021)
Pepsi has reported organic revenue growth of 13% to $19.2bn, with underlying operating profit up 22% to $3.2bn. This reflects strong performances from all divisions apart from Quaker Foods North America, and there was particularly strong growth in PepsiCo Beverages North America.
Management has increased guidance. They now expect full year organic revenue growth of 6%, compared to mid-single-digits, and an 11% increase in underlying earnings per share, compared to high single digits. The group still plans to return roughly $5.9bn to shareholders, through dividend payments of $5.8bn and share repurchases of $106m, which are already completed.
The shares rose 1.7% 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 around twice that of its more famous rival.
Like Coca-Cola, Pepsi has a diverse mix of top quality brands - 23 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. 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. We thought COVID-19 would knock these targets back a bit, but management is still expecting six percentage points of revenue growth this year. Hopefully that will see Pepsi build on 49 consecutive years of dividend growth. Remember no dividend's guaranteed and this should not be seen as a guide to the future.
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 though, although it's not too much of a concern at the moment. Pepsi is a 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 above its long run average, only time will tell if the less focused, but perhaps more forward thinking business model can deliver the necessary results.
Pepsi key facts
- Price/Earnings ratio: 23.6
- 10 year average Price/Earnings ratio: 19.7
- Prospective dividend yield (next 12 months): 3.0%
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 (all profits are core, revenue growth is organic)
Sales at Frito-Lay North America rose 6% to $4.6bn, thanks to both pricing and volume increases. Operating profits of $1.4bn were 7% ahead of last year, reflecting increased revenue, lower costs from Covid but higher overall operating costs and marketing expenses.
Quaker Foods North America saw revenue fall 14% to $575m, as volumes fell 21% and price increases were unable to bridge the gap. The revenue decline followed ''double-digit declines in oatmeal, pancake syrup and mix, and ready-to-eat cereals''. The group pointed out that demand was moderating after a substantial surge due to the pandemic last year. Operating profits fell 35% to $128m.
Operating profits at PepsiCo Beverages North America were up 83% to $811m. That reflected a 21% increase in revenue to $6.2bn, helped by a 20% increase in non-carbonated beverage volumes. Covid related charges were 33 percentage points lower than last year, although some other costs increased.
Revenue in Latin America rose 16% to $2.0bn and operating profits rose 47% to $362m. Europe saw revenue rise 15% to $3.3bn, and operating profits for the segment were $420m, up 11% compared to last year.
Operating profits in Africa, Middle East and South Asia were up from $221m to $265m, and revenue rose 15% to $1.6bn. Asia Pacific, Australia and New Zealand and China Region reported an 6% revenue increase to $1.1bn and profits for the division fell 3% to $196m.
Net debt at the end of the quarter was $36.5bn, up from $34.6bn at the end of last year.
This article is original Hargreaves Lansdown content, published by Hargreaves Lansdown. 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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