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PepsiCo: Beverages Are Back

GuruFocus.com
·5 mins read

- By Nathan Parsh

Several consumer staple companies have reported quarterly results recently, and many of them beat expectations for both revenue and earnings. These companies include General Mills Inc. (NYSE:GIS), McCormick & Co. (NYSE:MKC) and Conagra Brands Inc. (NYSE:CAG).

It is PepsiCo Inc. (NASDAQ:PEP), however, that appears to have had the best quarter thus far among consumer staple stocks that have already reported results this earnings season.


Quarterly highlights

PepsiCo reported earnings results for the third quarter on Oct. 1. Following a decline in the previous quarter due to the Covid-19 pandemic, the company saw a return to growth this time around. Revenue increased 5.3% to $18.1 billion, $852 million above what Wall Street analysts had been expecting. Adjusted earnings per share increased 10 cents, or 6.4%, to $1.66. This was 17 cents higher than the average analyst's estimate. Currency was a headwind of 2% and 3% to revenue and earnings per share, respectively.

Not only did PepsiCo return to growth following a down quarter, but the company produced its largest beat on both the top and bottom line in at least five years.

PepsiCo had organic revenue growth of 4.2% for the quarter, easily beating expectations of 1.6% and topping last year's third-quarter mark of 3.6%.

Last quarter, it was food and snacks that limited the damage from the pandemic caused for beverages. This quarter, food and snacks were still strong (at least 2% volume growth in all geographic regions), but beverages returned to growth as well. Total volumes for beverages were only up 1%, but this is a remarkable improvement from the 11% decrease seen in the last quarter.

Despite a 1% drop in volumes, PepsiCo Beverages North America had 6% reported sales growth. This segment was negatively impacted by away-from-home sales during the second quarter, but this pressure eased during the third quarter. Convenience and gas sales ticked meaningfully higher and e-commerce continues to be an area of growth. Foodservice, which will likely be the last of the channels to return to growth, wasn't nearly as bad.

Leadership cited the company's innovative zero sugar beverages (more than $1 billion in total sales so far in 2020) as one reason for the rebound in beverages, but carbonated sales did begin to improve in June as restrictions related to COVID-19 were lifted in major markets.

It wasn't just carbonated beverages that performed well. PepsiCo's line of Lipton and Starbucks products were up double digits, while Gatorade grew at a high single-digit clip. The company's market share increased in coffee, tea and juice categories.

Frito-Lay North America continued its string of excellent quarters, posting 7% sales growth and a 2.5% increase in volumes. This segment benefited from higher at-home consumption and improved its market share in the snack category. Tostitos were among the leaders in the quarter with double-digit sales gains. As with beverages, Frito-Lay saw a significant improvement in convenience and gas channels compared to the previous quarter.

Quaker Foods, which really had an explosion in revenue in the previous quarter, grew 6% with a 4% increase in volumes. Lite snacks, pastas and macaroni and cheese provided the bulk of improvements, but pancake mixes and syrups were also a contributing factor.

Nearly all of the regions outside of North America that PepsiCo competes in enjoyed solid growth as well. Organic growth for international snacks was up 5% while beverages increased 2%.

Europe had 3% sales growth. Beverages were the real star as volumes were higher by 11%. Food and snack volumes held their own, producing 4% growth. PepsiCo had an increase in market share in key markets such as France and Germany.

The Africa, Middle East and South Asia segment was up 31%, mostly due to PepsiCo's purchase of South African based Pioneer Foods.

The Asia Pacific, Australia, New Zealand and China region had sales growth of 15%, due in large part to the completed acquisition of Chinese online snack company Be & Cheery. This segment did have organic growth of 5%, including a 7% increase in volumes for food and snack and 6% for beverages.

Latin America sales were down 13%, but much of this was due to foreign currency exchange rates. Organic sales were up 1% as higher volumes in food and snacks offset declines in beverages.

PepsiCo's balance sheet remains in solid shape. The company ended the quarter with current assets of $24.1 billion. Cash and cash equivalents totaled $9.1 billion. Current liabilities are $26 billion, with almost $6.7 billion of debt due within a year.

Following quarterly results, PepsiCo has now resumed its guidance for 2020. The company expects full-year organic growth of 4% and adjusted earnings per share to decline 0.5% to $5.50. The organic growth is a solid number considering the impact from the pandemic and not too far off last year's 4.5% growth figure. A slight decline in earnings per share can also be considered a win given the circumstances. Currency translation is expected to lower revenue and earnings per share results by 2%. PepsiCo also plans to distribute $5.5 billion of dividends for the year while retiring $2 billion worth of stock.

Final thoughts

Following a difficult second quarter, PepsiCo managed to right the ship in the third quarter that led to the company's widest beat of top and bottom-line expectations in more than 20 quarters. The easing of away-from-home restrictions helped the turnaround in beverages and food and snacks continue to increase market share.

Shares of PepsiCo are not cheap at more than 25.1 times forward earnings, but the company weathered a difficult second quarter quite well and showed what its product portfolio can do in a more normalized business environment.

PepsiCo also has a dividend growth streak approaching 50 years and offers a nearly 3% dividend yield.

Combined operational performance with a long history of raising dividends makes PepsiCo a strong core holding for dividend growth investors. This helps to justify the valuation, making the stock a buy.

Disclosure: The author has a long position in PepsiCo, General Mills and McCormick.

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This article first appeared on GuruFocus.