Earnings Analysis: Pepsico (PEP)
On October 2, Pepsico announced their third quarter earnings results while saying goodbye to their CEO. This was the last day and last earnings call to be led by Indra Nooyi, a venerable champion in the business with her strong leadership pointed towards a strong future for the company by making sure they stayed in front of and fully involved in snack and beverage trends. I'll get more into the company's future as I close this up, though. As for the earnings results themselves, the company generated non-GAAP earnings of $1.59 which beat consensus by two cents and delivered organic revenue growth of 4.9%. Core constant currency growth was 9%. This included a 2% impact from currency conversion, given the recent strength of the US Dollar. They also guided up on their expectation for organic growth from less than 3% to at least 3%, a sign of confidence that their final quarter looks bright.
While profit was down for the North American Beverages segment, Revenues again continued to improve, however, costs like packaging and transportation were on the rise - which was a significant impact on those profits. These result will continue the cat-calls we're starting to hear for the breakup of Pepsico again where Frito Lay is spun out to get a better price for its faster growth. With a new CEO at the helm, there is speculation that Nelson Pelts and his Trian hedge fund may come back at Pepsico for another shot at breaking up the company, after accepting the results of the last investigation about a year and a half ago. While I personally hope this isn't true, I certainly understand the logic people put to this, as a new CEO is best to reevaluate the portfolio and figure out how he'll put his stamp on things anyway. Given that the company may see increased stock price pressure, anything is possible as we move forward.
Outside of NAB, growth was strong pretty much everywhere around the globe - particular in snacks. New innovative products continue to hit the shelves and are met with good results. The introduction of a low sugar Gatorade has helped the case in the sports beverages space and now the company has purchased Soda Stream in an effort to appeal to the longer term trend of people wanting to eliminate bottles. Soda Stream was interesting before, but think about how much nicer it may be when you can simply make your own Pepsi, Mountain Dew, or a wide variety of Bubly or Bubly-like flavorings of sparkling water. I think there are some strong synergies and revenue opportunities, should Pepsic go down this route, however, this will only serve the home well. It currently will not serve the mobile consumer for reducing bottle usage.
Finalizing things by looking at the stock itself, Pepsico has become more of a diversification holding for me. I do not expect it to outperform the market with rising rates that now provide solid competition in comparison to Treasury notes. This general unfavorability will result in the stock's multiple going down, however in times like this past week when interest rates and the health of the economy scare people, it will be a go-to source for safety. The company expects to earn $5.65 this year and I'm estimating 2019 earnings of $6.15. I've lowered my multiple expectations to 18.5, resulting in a 2019 price target of $114. As I said, I expect this company to be slow going. Given it's current price, I maintain my current status of a 2, but if the stock does come in a bit more, I will upgrade and start considering price points I'm willing to buy, given my low cost basis.
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.
While profit was down for the North American Beverages segment, Revenues again continued to improve, however, costs like packaging and transportation were on the rise - which was a significant impact on those profits. These result will continue the cat-calls we're starting to hear for the breakup of Pepsico again where Frito Lay is spun out to get a better price for its faster growth. With a new CEO at the helm, there is speculation that Nelson Pelts and his Trian hedge fund may come back at Pepsico for another shot at breaking up the company, after accepting the results of the last investigation about a year and a half ago. While I personally hope this isn't true, I certainly understand the logic people put to this, as a new CEO is best to reevaluate the portfolio and figure out how he'll put his stamp on things anyway. Given that the company may see increased stock price pressure, anything is possible as we move forward.
Outside of NAB, growth was strong pretty much everywhere around the globe - particular in snacks. New innovative products continue to hit the shelves and are met with good results. The introduction of a low sugar Gatorade has helped the case in the sports beverages space and now the company has purchased Soda Stream in an effort to appeal to the longer term trend of people wanting to eliminate bottles. Soda Stream was interesting before, but think about how much nicer it may be when you can simply make your own Pepsi, Mountain Dew, or a wide variety of Bubly or Bubly-like flavorings of sparkling water. I think there are some strong synergies and revenue opportunities, should Pepsic go down this route, however, this will only serve the home well. It currently will not serve the mobile consumer for reducing bottle usage.
Finalizing things by looking at the stock itself, Pepsico has become more of a diversification holding for me. I do not expect it to outperform the market with rising rates that now provide solid competition in comparison to Treasury notes. This general unfavorability will result in the stock's multiple going down, however in times like this past week when interest rates and the health of the economy scare people, it will be a go-to source for safety. The company expects to earn $5.65 this year and I'm estimating 2019 earnings of $6.15. I've lowered my multiple expectations to 18.5, resulting in a 2019 price target of $114. As I said, I expect this company to be slow going. Given it's current price, I maintain my current status of a 2, but if the stock does come in a bit more, I will upgrade and start considering price points I'm willing to buy, given my low cost basis.
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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