Earnings Analysis: Pepsico (PEP)
Today Pepsico kicked off the next wave of earnings reports in my portfolio for 2017. Third quarter results turned out to be a bit mixed, as the company reported earnings of $1.48 and revenues of $16.24B. This beat market consensus on the earnings side by four cents, however missed consensus on revenues by $70M. Operating margins were up, contributing to the earnings beat, however, organic growth was a paltry 1.7%, a level that was commented to have "lagged the industry."
The management team, whom I've come to respect and trust as a shareholder, held back no punches when describing their quarter. Seconds within opening her remarks, CEO Indra Nooyi clearly stated why they missed top line marks, stating that North American Beverages (NAB), in particular, was the sore spot and that this is a temporary issue that has already been responded to and is already showing improvement. More on this shortly.
The call had some good news and some bad news. First, on the good news side, the company's earnings was strong, despite lower than expected revenues, showing considerable cost control and operating margin strength with the company's "Smart Spending" program. Earnings revenue is expected to continue to be strong with upgraded foreign currency impacts and margin strength. As such, the company raised 2017 guidance to $5.23, expecting 9% earnings growth from 2016 after a 1% decline due to currency. Finally, the company's Frito Lay division is performing remarkably well. This quarter could've and would've been a lot worse, were it not for this division significantly outperforming expectations with their savory snacks.
On the down side, the company didn't execute the best, with improper management of shelf space while expanding product bases being a primary factor for the NAB division's poorer performance. While it's disappointing to see them miss a step like this, it can also be said that it's good that they recognized the issue somewhat quickly and remediated the situation. If they're truly seeing improvements from this already, it strikes confidence in the company's ability to be agile. The second problem, more out of their control, is weather. This summer was quite cooler and wetter in the July/August time frame and this resulted in lower construction work and convenience store sales. Blaming performance on weather is never a great situation, but this argument has credence, so I'm willing to give them a pass, while holding some skepticism. The food and beverage industry, as a whole, has been under a lot of pressure right now and it won't be until other companies report that we'll get a better picture as to if this is a trend across the segment, or if it's just raining in Pepsico's back yard. The final down side is the guide down on organic growth. Due to this quarter's poor results, organic growth has been guided down to 2.3% for the year, down from a "minimum of 3%," previously.
All of these results have me tempering my enthusiasm for the stock's prospects for a little while. I believe the company's strategy is still correct and they will do fine. However, organic growth is not as strong as it has been before or was expected. The company does still have a strong yield at around 3% which can also be relied on and expected to be raised come next spring/summer. The CPG segment, as a whole, is hitting more headwinds, though, as there are more expectations for a Fed rate hike again in December. All of these factors have me lowering my multiple to 20. I am also raising my 2018 earnings target to $5.75 based on performance improvement, though I may have gone from conservative to slightly aggressive, estimating earnings growth of 10% next year. All of this puts my price target down to $115. Potentially why the stock rebounded into the green after going down to almost $106 at the market's opening today. I leave the stock as a 2 for now, primarily because of the segment's head winds. I want to hear more from peers before I make changes. It probably needs to get down around $105 before considering picking more shares up.
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.
The management team, whom I've come to respect and trust as a shareholder, held back no punches when describing their quarter. Seconds within opening her remarks, CEO Indra Nooyi clearly stated why they missed top line marks, stating that North American Beverages (NAB), in particular, was the sore spot and that this is a temporary issue that has already been responded to and is already showing improvement. More on this shortly.
The call had some good news and some bad news. First, on the good news side, the company's earnings was strong, despite lower than expected revenues, showing considerable cost control and operating margin strength with the company's "Smart Spending" program. Earnings revenue is expected to continue to be strong with upgraded foreign currency impacts and margin strength. As such, the company raised 2017 guidance to $5.23, expecting 9% earnings growth from 2016 after a 1% decline due to currency. Finally, the company's Frito Lay division is performing remarkably well. This quarter could've and would've been a lot worse, were it not for this division significantly outperforming expectations with their savory snacks.
On the down side, the company didn't execute the best, with improper management of shelf space while expanding product bases being a primary factor for the NAB division's poorer performance. While it's disappointing to see them miss a step like this, it can also be said that it's good that they recognized the issue somewhat quickly and remediated the situation. If they're truly seeing improvements from this already, it strikes confidence in the company's ability to be agile. The second problem, more out of their control, is weather. This summer was quite cooler and wetter in the July/August time frame and this resulted in lower construction work and convenience store sales. Blaming performance on weather is never a great situation, but this argument has credence, so I'm willing to give them a pass, while holding some skepticism. The food and beverage industry, as a whole, has been under a lot of pressure right now and it won't be until other companies report that we'll get a better picture as to if this is a trend across the segment, or if it's just raining in Pepsico's back yard. The final down side is the guide down on organic growth. Due to this quarter's poor results, organic growth has been guided down to 2.3% for the year, down from a "minimum of 3%," previously.
All of these results have me tempering my enthusiasm for the stock's prospects for a little while. I believe the company's strategy is still correct and they will do fine. However, organic growth is not as strong as it has been before or was expected. The company does still have a strong yield at around 3% which can also be relied on and expected to be raised come next spring/summer. The CPG segment, as a whole, is hitting more headwinds, though, as there are more expectations for a Fed rate hike again in December. All of these factors have me lowering my multiple to 20. I am also raising my 2018 earnings target to $5.75 based on performance improvement, though I may have gone from conservative to slightly aggressive, estimating earnings growth of 10% next year. All of this puts my price target down to $115. Potentially why the stock rebounded into the green after going down to almost $106 at the market's opening today. I leave the stock as a 2 for now, primarily because of the segment's head winds. I want to hear more from peers before I make changes. It probably needs to get down around $105 before considering picking more shares up.
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.
Comments
Post a Comment