Earnings Analysis: Pepsico (PEP)
Last Tuesday Pepsico helped kick off my earnings season by beating both top and bottom line expectations. Earnings came in at $1.46 and revenues were $15.71B compared with average estimates of $1.40 and $15.61, respectively. Overall, the reporting results were good, however there was some hair in there.
For the good, organic revenue grew to 3.1%, pulling up the year to date number to 2% growth. Targets stayed in line for an "at minimum" 3% organic revenue growth for the year. The company was able to pass on price increases, which is always a good sign for consumer strength. Growth outside of the US was strong and encouraging. The snacks division, in particular, was exceptionally strong in Latin America and Europe, though it also performed well (over 3% reported growth) too. The story continues to be intact and the management team continues to deliver on their words better than any other CPG company in the industry right now.
Not everything was perfect, though. Operating margins were down slightly, though efficiency gains were able to result in better operating profits. The beverages unit continues to see some struggles as well, as a shift away from sugary drinks and regulations like sugar taxes has its toll. Even stall worth Gatorade wasn't immune to these impacts. During the commentary it was noted that the beverage sector had its struggles, but new introductions and continued effort should maintain their market shares. It also seems that the method of sale (traditional vs. online) may also have its own side effects. Finally, it seems that people consider this quarter's results to only be in-line with expectations due to a divestiture of it's Britvic business, which resulted in a $0.06 favorable gain in EPS.
It is worth noting that the downside is more something to watch for a change in pattern than a real issue. Earnings guidance was increased from $5.09 to $5.13 based on performance and outlook, so it wouldn't seem that there is too much concern that they can't address and properly react to any of the negatives. While I understand analysts' perspective on the EPS, it was obvious they were selling a business that just wasn't the best fit for them, as operating margin improved with the sale. I expect the strong results will continue.
At this time, I reiterate my 2017 earnings estimates of $5.14. Now that we're into the second half of the year, I'm estimating 2018 earnings to be $5.49. I will cautiously increase my multiple from 21 to 22, providing a 2018 price target of $120. I feel the multiple remains fair for the best CPG company in this economic environment. Rate increases may put pressure on this as we go through this half of the year and move into next year. There will come a point where bonds are a safer alternative with similar yield and I still expect to see Pepsico suffer some for that fact. Given this, I maintain a 2 rating for now.
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.
For the good, organic revenue grew to 3.1%, pulling up the year to date number to 2% growth. Targets stayed in line for an "at minimum" 3% organic revenue growth for the year. The company was able to pass on price increases, which is always a good sign for consumer strength. Growth outside of the US was strong and encouraging. The snacks division, in particular, was exceptionally strong in Latin America and Europe, though it also performed well (over 3% reported growth) too. The story continues to be intact and the management team continues to deliver on their words better than any other CPG company in the industry right now.
Not everything was perfect, though. Operating margins were down slightly, though efficiency gains were able to result in better operating profits. The beverages unit continues to see some struggles as well, as a shift away from sugary drinks and regulations like sugar taxes has its toll. Even stall worth Gatorade wasn't immune to these impacts. During the commentary it was noted that the beverage sector had its struggles, but new introductions and continued effort should maintain their market shares. It also seems that the method of sale (traditional vs. online) may also have its own side effects. Finally, it seems that people consider this quarter's results to only be in-line with expectations due to a divestiture of it's Britvic business, which resulted in a $0.06 favorable gain in EPS.
It is worth noting that the downside is more something to watch for a change in pattern than a real issue. Earnings guidance was increased from $5.09 to $5.13 based on performance and outlook, so it wouldn't seem that there is too much concern that they can't address and properly react to any of the negatives. While I understand analysts' perspective on the EPS, it was obvious they were selling a business that just wasn't the best fit for them, as operating margin improved with the sale. I expect the strong results will continue.
At this time, I reiterate my 2017 earnings estimates of $5.14. Now that we're into the second half of the year, I'm estimating 2018 earnings to be $5.49. I will cautiously increase my multiple from 21 to 22, providing a 2018 price target of $120. I feel the multiple remains fair for the best CPG company in this economic environment. Rate increases may put pressure on this as we go through this half of the year and move into next year. There will come a point where bonds are a safer alternative with similar yield and I still expect to see Pepsico suffer some for that fact. Given this, I maintain a 2 rating for now.
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.
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.
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