Earnings Analysis: Pepsico (PEP)

Stock Ratings: 1 = buy at current stock prices, 2 = buy on a 5-10% dip in stock price, 3 = sell on a 5-10% increase in stock price, 4 = sell at current stock prices to raise cash.  Ratings are based upon 12-18 month outlook on stock direction and not necessarily related to moves I make due to financial positioning.

Pepsico announced their first quarter results on Monday.  Results were positive with earnings, reporting a core-constant result of $0.89 - eight cents over consensus.  Revenues were just below expectations (in line basically) at $11.86B.  Foreign currency translation continues to be an ongoing issue in terms of net profits and there were some one-time charges to reduce the value of their 5% stake in a Chinese beverage company and to roll off their Venezuelan business.  The core-constant EPS growth of 11% compared to a year ago is a testament to what Pepsico has been doing in terms of cost cutting and margin improvements, both which were positive again.  It was also positive to see growth both organically and via price increases in both the North American beverages and snacks businesses.  Sodas continue to decline as a part of the US shift away from excess calories, however their broad portfolio of "still" beverages like water, teas, sports drinks, juices, and coffees are gaining traction, showing the company continues to adjust to the times and position themselves correctly.

Internationally, the snacks business showed strong growth, particularly due to the positive reception of cheese flavored Cheetos.  Beverages did not grow as much and messages from CEO Indra Nooyi were notably cautious.  She is finding the global economies very tough right now and expects to see challenges for companies that operate globally.  She noted particular challenges in Brazil and Russia.  The former due to political instability and economic impacts due to the energy industry, which the country relies strongly on.  The Russian and Eastern European block are seeing impacts due to not being able to successfully raise prices to account for currency translation issues.  Both of these areas are significant factors to Pepsico's international finances, which account for 44% of all of their business.  These messages have caught my attention and pose some risk, however, concern of the global economy has been playing out for awhile now.  Pepsico has been weathering the storm very well, all things considered.  This is shown all the more by their reiteration of their yearly guidance of flat revenues compared to 2015 and EPS of $4.66 which is 2% higher than a year ago and 8% higher on a core-constant basis.

So that leaves us with the current state and the future projections.  I do feel as though management might be trying to lower expectations a little so people don't get ahead of themselves, but this quarter's results also show how some of the global impacts still create pressure on earnings instead of seeing stronger improvements.  I have no doubts that the company is well positioned for the long term and is likely one of the best operating CPG companies - especially in the food space.  It's possible you could get a slightly higher multiple, say 24, but I'd rather stay a little more conservative right now and stick with my multiple of 22.  The market is starting to do another shift to cyclical stocks.  I'm not sure if it's temporary or a longer trend, but as it's happened, Pepsico's stock has taken a hit.  It's also possible that others see the same as me and feel we need to pause right now.  Pepsico reiterated earnings of $4.66.  I'm also maintaining my multiple of 22.  So my price target hasn't changed from $103.  Yes, I do understand that a quality company as this could get a higher multiple and that gets us to about $110.  But given it's 2.76% yield and a US economy that's getting more and more confirmation of improvement, it's really hard to see the stock get much higher than that this year.  That doesn't mean I'll jettison the stock, but I also need to keep mindful of price targets and downside risk.  If the market moves towards higher risk or higher value at the expense of "bond market equivalent" stocks, I expect Pepsico won't be spared at the altar of selling.

Nothing on this site should be taken as advice, research, or an invitation to buy or sell any securities.  All views expressed are solely of my own and I am not a professional money manager.  Please consult with your financial adviser before taking any action in your own portfolio.