Thursday, February 16, 2017

Earnings Analysis: Pepsico (PEP)

Notes:
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.

On Wednesday, Pepsico announced fourth quarter and fiscal year 2016 financial results.  Numbers for the fourth quarter were basically within expectations for the top line and a bottom line beat of four cents compared to estimates ($19.5B revenues and $1.20 EPS delivered).  Results were strong as the company managed to essentially meet or beat all of their financial metrics.  It can be said that organic growth came a little below expectations at 3.7% vs. the 4% they targeted, but I'll give them a pass on it.  These growth numbers are off of strong numbers delivered in 2015, so I feel satisfied with the growth represented.  Foreign exchange rates continue to be a problem for the company, with countries like Mexico and Brazil being large portions of their sales, while their currency continues to be devalued against the dollar.  Margins were slightly compressed compared to previous quarters, though management expected it.  There was also some nice reductions in SG&A to help the overall picture.  In addition, the company has already raised its dividend to $3.22 per year and promised $2B in buybacks.  The dividend increase sets the stock at 3% yield as of close on Tuesday, which is a fairly healthy return.  The buyback is lower than it has been in past years, but they used to have their buybacks outpacing their cash flow.  This is now in line with their guidance to keep cash levels sustainable.

In general, the company delivered excellent numbers.  Compare them to some of their peers and the results look even better yet.  It does seem that guidance has caught people by surprise - at least initially - though.  Guidance was "at least 3%" organic growth, and Core EPS growth of 8% (they delivered 9% this year).  Management's earnings guidance was $5.09.  To me, this seems conservative.  Management clearly stated that they are providing guidance for what they know they can meet.  If their worries around macro conditions and volatility turn out to be no big deal, it should set them to beat expectations.  The company also has a history of keeping expectations reasonable, but low and then they raise guidance halfway through the year.  I don't feel this is set up to be much different from that history.  

I believe this company has the right management in place to continue to lead it in the direction we want and need as shareholders.  Their focus is on the right trends and growth while also looking to cut costs and be more efficient.  Guidance may be seen as a concern for some, but I find it to be more of a floor to build off of.  There are downsides and risks here, though.  The stock is already priced around 21 times this year's expected earnings as per guidance.  With interest rates seemingly more likely to rise, I don't believe there's a lot of room for the stock to run a lot higher.  I'm going to guide to an earnings expectation of $5.14 for next year, anticipating things will be better than they currently feel.  This is a couple cents lower than my original estimates as a sign of my own cautiousness.  That sets my price target at $108 for 2017.  While I certainly feel that the company is performing in a way that deserves to get a higher multiple than Coke (which it doesn't today), I don't expect we'll see the multiple get higher.  I expect to see the stock performance of CPG companies to under perform the S&P 500, but I want to keep a position for diversification.  As such, I find the stock to continue to be a core holding and rank it at a 2.  However, I wouldn't look to buy more shares until around the $100 mark - a point I find not to be out of question, given our current macro and economic environments.   

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.