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PepsiCo Strengthens Snacking Unit, Product Launches on Track

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PepsiCo, Inc. PEP is constantly making efforts to strengthen its snacking category. In sync with this, Ruffles and Anthony Davis collaborated to extend the business and reach new heights with the launch of new flavor - Lime and Jalapeno. Recently, the Cheetos brand also launched Cheetos popcorn in stores nationwide. The new Cheetos ready-to-eat popcorn is available in two flavors - Cheddar and Flamin' Hot.

Also, Lay's unveiled three new chip flavors across its entire portfolio as the New Year kicked off. These three flavors include Lay's Cheddar Jalapeno, Lay's Poppables Sea Salt & Vinegar, and Lay's Kettle Cooked Flamin' Hot.

Moreover, Doritos launched two remixes of fan favorite flavors - Flamin' Hot Limon and Amped-Up Cool Ranch. The new Flamin' Hot experience carries the same signature heat but with a tangy twist, while Doritos Cool Ranch brings even more Cool Ranch flavor.

Notably, PepsiCo holds the number one position in the global snacks market, with popular brands like Doritos, Cheetos and Lay’s. Just over half of its sales come from snacks, while the remainder is contributed by beverages.

PepsiCo has the competitive advantage of selling both snacks and beverages, which are complementary food categories. The complementary portfolio results in cost leverage, capability sharing, cross-category promotions and other commercial benefits.

The Frito-Lay North American snacks business has delivered consistent solid performance over the last four years. Notably, Frito-Lay is growing value share in salty, savory and macro snack categories. Investments in innovation, marketing, consumer insights and manufacturing capabilities in this segment have led to strong revenue growth for its mainstream brands like Doritos, Cheetos, Ruffles and Fritos. Additionally, it drove double-digit growth for its smaller premium brands such as Bare and Off the Eaten Path.

Gaining significant share in the snacking market, PepsiCo’s Frito-Lay North America business reported core constant-currency operating profit growth of 4% and organic revenue growth of 5.5% in third-quarter 2019. Moreover, organic snacks/food volume increased 1% in the third quarter. This segment is likely to continue delivering strong sales and profits as the demand for savory snacks is rising.

Apart from the company’s snacking business, its better pricing, strength in product and geographic portfolios, product innovation, and progress on productivity targets have been supporting its strong position in the beverage industry. It is committed to driving greater efficiency and effectiveness by reducing costs and plowing back these savings to develop scale and core capabilities. It expects to achieve the productivity savings goal of at least $1 billion annually through 2023 on restructuring actions.

We note that shares of this Purchase, NY-based company have increased around 5% in the past six months, outperforming the industry’s growth of 3.7%.

However, this Zacks Rank #4 (Sell) company is grappling with higher cost and adverse impacts from currency fluctuations. Also, unfavorable impacts of ongoing investments to strengthen business, higher tax rate, and the absence of asset sale and refranchising gains that occurred in 2018 are likely to hurt PepsiCo’s earnings in the quarters ahead.

Key Picks

Constellation Brands, Inc. STZ has a long-term earnings growth rate of 8.2% and carries a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Luckin Coffee LK delivered a positive earnings surprise of 13.5% in the last reported quarter and has a Zacks Rank #2.

Coca-Cola European Partners plc CCEP has a long-term earnings growth rate of 8.9% and a Zacks Rank #2.

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