Earnings Analysis: Pepsico (PEP)
Back on April 30 (yeah, I'm way behind), Pepsico announced their first quarter financial earnings for 2018. Earnings came in at $0.96, beating consensus by three cents and sales were $12.56B also ahead of analyst expectations of $12.35B. Finally, organic growth came in line with company guidance at 2.3%. In all, the quarter was solid. Maybe not perfect, but definitely solid.
As has been the case for a couple quarters already, North American Beverages (NAB) under performed the overall company. There were operating and raw material inflation costs as well as some one-time bonus impacts. That said, NAB did improve performance quarter over quarter for the third quarter in a row. Guidance has been that this is the path they're on and that it will continue, so I see that as a positive at this point. There are worries among the analyst community about competition and pricing wars, particularly in the sports drink section, but management seems to have the facts to back up their strategy as well as some new products set to be released that are aimed to target key needs and desires, particularly in low calorie refueling options.
In the rest of world, beverages performed well, with mid single digit growth. Sub-Saharan Africa pulled in some of the greatest strength. Snacks continue to do particularly well with double digit growth outside of the US. With the success of Frito-Lay, we could continue to year occasional cries that beverages is holding the snacks values back. I trust this management team and the work they've done to prove the value of having both together.
Guidance remains unchanged for 2018, so I still expect earnings to come in around $5.75. What has changed, though is how we price the stock. Interest rates on the 10 year have gone above 3% and for the last month the stock has been beat up hard. People are not willing to pay for steady growth for a yield that is similar to treasuries. They want growth in this environment, and as such, we are seeing multiple contraction in action. I kind of saw this coming, but maybe didn't do enough to reap some profits before hand. Instead, I have raised my rank of the stock to a 1 and will slowly accumulate my position over time. I honestly don't think the stock is done going down, though it does seem to have some stability right now. ON anticipated earnings, the stock is trading around 17 times earnings and the yield is approaching 4%. I could see yield get near 4.25% if the economy stays good and it getting closer to 4.5% if things go bad. That means downside risk between $82 and $87. I do feel the company is worth a multiple of 18 which puts my 2018 price target at $103. Just note that we may have already hit that target on the year and we're more likely to just stroll around these levels for a while.
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.
As has been the case for a couple quarters already, North American Beverages (NAB) under performed the overall company. There were operating and raw material inflation costs as well as some one-time bonus impacts. That said, NAB did improve performance quarter over quarter for the third quarter in a row. Guidance has been that this is the path they're on and that it will continue, so I see that as a positive at this point. There are worries among the analyst community about competition and pricing wars, particularly in the sports drink section, but management seems to have the facts to back up their strategy as well as some new products set to be released that are aimed to target key needs and desires, particularly in low calorie refueling options.
In the rest of world, beverages performed well, with mid single digit growth. Sub-Saharan Africa pulled in some of the greatest strength. Snacks continue to do particularly well with double digit growth outside of the US. With the success of Frito-Lay, we could continue to year occasional cries that beverages is holding the snacks values back. I trust this management team and the work they've done to prove the value of having both together.
Guidance remains unchanged for 2018, so I still expect earnings to come in around $5.75. What has changed, though is how we price the stock. Interest rates on the 10 year have gone above 3% and for the last month the stock has been beat up hard. People are not willing to pay for steady growth for a yield that is similar to treasuries. They want growth in this environment, and as such, we are seeing multiple contraction in action. I kind of saw this coming, but maybe didn't do enough to reap some profits before hand. Instead, I have raised my rank of the stock to a 1 and will slowly accumulate my position over time. I honestly don't think the stock is done going down, though it does seem to have some stability right now. ON anticipated earnings, the stock is trading around 17 times earnings and the yield is approaching 4%. I could see yield get near 4.25% if the economy stays good and it getting closer to 4.5% if things go bad. That means downside risk between $82 and $87. I do feel the company is worth a multiple of 18 which puts my 2018 price target at $103. Just note that we may have already hit that target on the year and we're more likely to just stroll around these levels for a while.
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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