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What Does PepsiCo's Q3 Earnings Indicate About Its Future?

Zacks Equity Research

PepsiCo reported better-than-expected earnings, sales and organic revenues in the third quarter thanks to high returns from investment in marketing and advertisements. Further expansion in the company’s portfolio and ramp up of production facilities will help it grow in the near future.

Strong Third-Quarter Earnings and Revenues

On Oct 3, PepsiCo, Inc. PEP reported better-than-expected third-quarter earnings and sales. The company now has record high sales in nine out of the last 11 quarters. Third-quarter core earnings per share came in at $1.56, beating the Zacks Consensus Estimate of $1.50.

Earnings were driven by increase in sales of Frito Lay in North America and overseas. Organic revenues came in at $17,188 million, surpassing the Zacks Consensus Estimate of $16,964 million. PepsiCo’s shares rose nearly 3% on Oct 3, after the report was released.

Frito Lay North American division which has brands like Cheetos and Doritos logged revenue growth of 5.5%, while North American beverage business sales increased by 3%. A 9% surge was reported in the AMENA (African, the Middle East, Asia and Australasia) zone and sales in Latin America grew 4%.

The organic revenue was driven by strategic changes and investments made in sub-brands, manufacturing and go-to-market capacity to boost growth. As per the company’s growth strategy, a huge amount has been invested in marketing and advertisement of products in this quarter. 

PepsiCo’s CFO Hugh Johnston claims that the strategy helped in winning more customers and led to an increase in financial results from advertisement. The company also partnered with celebrities like model Chrissy Teigen as part of the advertisement strategy.

The spending on advertisement that pushed PepsiCo’s trademark Cola, Mountain Dew and Gatorade drinks was increased to 12%. In fact, advertisements did have a positive impact, for example the brand’s no-sugar line, Gatorade Zero, launched in May 2018 brought in $500 million in retail sales that surpassed expectations.

The factors that impacted revenues negatively were restructuring charges, foreign exchanges and a few sub brands. The third quarter saw a 1% negative impact due to foreign exchange.  There was a double-digit sales decline in Sabra hummus and guacamole dips. The brand is a joint venture with Strauss Group, and PepsiCo holds a 50% stake.

Stock Performance

PepsiCo has grown 26.2% on a year-to-date basis compared to the S&P 500’s growth of 16%. CEO Ramon Laguarta claims that this year-to-date performance will help the company meet its full-year organic revenue growth target of 4%. Hence, its shares should move north.

Future Growth Plans

As per Laguarta, the company also plans to put capital against market opportunities that will deliver profits in the next 20 years. This also includes the acquisition of smaller companies to expand the existing portfolio and ramping up the existing production facilities to increase production of canned soda. Laguarta believes that PepsiCo already has a “very good portfolio” to address the existing and future demands for food and beverages specifically in North America.

The company anticipates closing the $1.7-billion acquisition of South Africa-based Pioneer Foods by the end of 2019 that should enhance the portfolio. Along with this, the company’s new product line which offers flavored sparkling water is gaining market share rapidly and may soon become a billion-dollar brand giving tough competition to National Beverage Corp.’s FIZZ La Croix.

On the share market front, the company plans to return $8 billion to its shareholders through dividend payments and make share repurchases of $3 billion. The dividend will account to $5 billion. The company estimates free cash flow to be around $5 billion and operating cash flow to be nearly $9 billion, with net capital spending of $4.5 billion.

PepsiCo has outpaced competition from National Beverage Corp. and The Coca-Cola Company KO which have year-to-date growth of -34.7% and 13.7%, respectively. Both PepsiCo and Coco Cola carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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