PepsiCo Stock Is A Buy: Q3 Earnings Results Tell You Why
Contributor since 2013 / 20667 Followers
Summary:
- PepsiCo’s stock is trading near its 52-week low despite strong Q3 results and management’s guidance for continued growth.
- The current yield is significantly above the historical average, making it attractive for dividend-focused investors.
- PepsiCo’s organic sales have been increasing, and it is a Dividend Aristocrat, making it a good investment option.
urbazon
PepsiCo (NASDAQ:PEP) hasn’t really benefited from the 2023 market rally. In fact, the stock is trading very near its 52-week low. You must go back to March of 2022 to find the shares trading ten percent below today’s levels.
However, third quarter results were quite strong, and management’s guidance is for a continuation of growth across all markets.
With the share price at this level, the current yield is significantly above the historical average. Investors focused on dividends can get the equivalent of about two years’ worth of dividend growth with this yield.
At the same time, those focused on reasonable growth can also expect to do well. Pepsi’s organic sales increased 14% in the first half of the year, and last years’ results were also strong.
Factor in Pepsi’s status as a Dividend Aristocrat, and you have a win/win/win scenario.
Dissecting Q3 Results
Pepsi’s Q3 Non-GAAP EPS of $2.25 beat analysts’ estimates by $0.10. Revenue, up 6.7% year-over-year, was in line.
Earnings per share adjusted for currency increased 16%, while reported EPS increased 15 percent. Gross profit was up 9% with core gross margin increasing by 105 basis points.
The company delivered 8.8 percent organic revenue growth, marking the tenth consecutive quarter Pepsi recorded at least high-single-digit organic revenue growth.
The company also reported core constant currency EPS growth of 16%, marking the sixth consecutive quarter in which the firm delivered double-digit core constant currency growth in EPS.
The North American and International businesses delivered 7% and 12% organic revenue growth, respectively. The global beverages and convenience foods businesses delivered 8% and 9% organic revenue growth.
PepsiCo is organized into seven reporting segments: Frito-Lay North America; Quaker Foods North America, PepsiCo Beverages North America, Latin America, Europe; Africa, the Middle East, and South Asia; and Asia-Pacific, Australia, New Zealand, and China.
Frito-Lay North America reported 7% organic revenue growth versus a 20% increase in the prior year quarter. That business gained market share in the macro and savory snack categories.
Frito-Lay’s core operating profit increased 5% due in large part to management’s planned business investments and a double-digit increase in advertising and marketing spend.
Quaker Foods North America’s organic revenue increased 5% percent compared to a 16% increase in organic revenue during the third quarter of 2022.
Management pointed to “holistic cost management initiatives” as the primary factor that drove core operating profit growth of 10%.
PepsiCo Beverages North America delivered 6% percent organic revenue growth versus 13% organic revenue growth in the comparable quarter. That division also reported 155 basis points of core operating margin expansion in Q3.
The segment’s core operating profit increased 21%, aided by ongoing productivity initiatives and a double-digit increase in advertising and marketing spend.
The International business, constituting approximately 40% of the firm’s net revenue in 2022, reported 12% organic revenue growth versus 16% organic revenue growth in the comparable quarter.
This marked the tenth consecutive quarter in which the International business delivered double-digit organic revenue growth.
The AMESA segment (Africa, the Middle East, and South Asia), delivered double-digit organic revenue growth in both beverages and convenient foods, with Pakistan and Egypt each delivering double-digit organic revenue growth and Saudi Arabia delivering high-single-digit organic revenue growth.
Pepsi also reported double-digit organic revenue growth from the Philippines, Turkey, Mexico, Brazil, and Poland.
China and Chile registered mid-single-digit organic revenue growth, while Australia, the U.K., and France delivered double-digit organic revenue growth.
Pepsi reported gaining savory snack share in China, India, Turkey, the Netherlands, South Africa, Belgium, Pakistan, Guatemala, and Puerto Rico.
The company also gained market share in beverages in Mexico, Brazil, Turkey, China, Thailand, Egypt, and Nigeria.
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Management guides for 2023 core earnings per share of $7.54, an 11 percent increase compared to 2022 core earnings per share of $6.79.
Organic revenue is expected to increase by 10% in 2023.
Core constant currency EPS is forecast to increase 13%, up from the previous 12% estimate. This marks the third consecutive quarter that management raised EPS guidance.
Assuming Pepsi remains on track, this would mark the third consecutive year of double-digit core constant currency EPS growth.
The company targets total cash returns to shareholders of approximately $7.7 billion with $6.7 billion in dividends and $1.0 billion in share repurchases.
Headwinds from foreign exchange are expected to negatively affect net revenue and core earnings per share performance by approximately 2%.
Pepsi also provides guidance for full-year fiscal 2024. Management expects results towards the upper end of long-term target ranges for both organic revenue and core constant currency earnings per share growth. The target ranges for organic revenue growth of 4% to 6% and core constant currency EPS growth at a high-single-digit percentage remain unchanged.
The Manifest Strengths of PepsiCo
With a 22% share, Pepsi holds the top position in the $200 billion global savory snacks market. Pepsi’s volume share of salty snacks is more than nine times that of its closest rival. Lay’s, with more than $30 billion in sales, is the world’s top-selling snack food brand.
Pepsi is also the globe’s second-largest beverage provider behind Coca-Cola (KO). In the sports category, Gatorade rules with a 40%-plus volume share globally.
Folks with a cursory understanding of Pepsi may be unaware of the breadth of the company’s products. Many may recognize Pepsi’s list of carbonated beverages, which includes Mountain Dew, Starry, and several variations of Mountain Dew, along with the aforementioned number one sports drink, Gatorade.
However, there are many that would be surprised to learn that Pepsi also counts Aquafina, Cap’n Crunch, Cheetos, Cracker Jack, Doritos, Frito-Lay, Fritos, Lay’s, Quaker, Rice-A-Roni, Ruffles, and Tostitos among its product lines.
Even if you know that every one of the above-listed names is a Pepsi product, I’m betting you are unaware of names like Agousha (Russia), Alvalle (Spain), Baconzitos (Brazil), Chipsy (Egypt, Serbia), Duyvis (Netherlands), Emperador (Mexico), Ivi (Albania, Greece, Cyprus, Serbia), Kurkure (Bangladesh, India, Pakistan), Paso de los Toros (Uruguay), Simba (Southern Africa), Smith’s (Australia), Walkers (United Kingdom), and Yedigün (Turkey).
Note the above is not an exhaustive list.
An overlooked strength of Pepsi lies in the fact that the company can serve as a sort of one-stop shop for retailers struggling with logistics worries. With a proven distribution system of its own, Pepsi can be counted on to stock shelves in a timely fashion. And Pepsi’s products drive sales and foot traffic.
Additional proof of the power of Pepsi’s distribution platform lies in the decades-long successful distribution partnerships with Unilever (UL) and Starbucks (SBUX).
Now consider this: how many times have you been in a convenience store, grocery store, or in the checkout line of a wide variety of retailers and seen Pepsi brands? Now hold up your hand if you’ve never purchased a Pepsi product.
(For those in my age demographic, this harkens back to the scene in Ferris Bueller, where the teacher repeats Ferris’ name over and over again).
The ubiquitous nature of Pepsi products reveals another of the company’s strengths. Pepsi’s scale provides bargaining leverage with suppliers and advertisers. In turn, this gives Pepsi pricing power.
It is a bit surprising, at least to me, that demand for snacks and beverages tends to remain resilient throughout economic cycles.
Proof of that lies in that over the past five years, excluding the inflation-driven price hikes of 2022, Frito-Lay North America grew price/mix at an average annual rate of 2.8%, well above the snack price inflation of 0.9% (according to Morningstar). Despite the price increase, Pepsi recorded volume growth at 2% in that product category.
Debt, Dividend, And Valuation
Pepsi has an A+ credit rating. The company ended the quarter with $10 billion in cash and cash equivalents, up from $6.1 billion last quarter and $4.9 billion at the end of 2022. The long-term debt remained stable at $35.8 billion.
Pepsi currently yields 3.14%. The payout ratio is 65.21% and the 5-year dividend growth rate is 6.87%.
Pepsi’s strong credit metrics and payout ratio indicate the dividend is safe and should continue to grow, albeit at a modest rate.
Pepsi’s forward P/E of 22.40x is below the 5-year average P/E ratio for the stock of 24.45x.
Pepsi’s 5-year PEG of 2.50x is well below the 5-year average PEG ratio of 3.57x for the stock.
Pepsi currently trades for $163.66. Prior to today’s earnings release, analysts 12-month average price target was $186.92.
Summation
Pepsi has an initiative designed to achieve $1 billion in annual cost savings and productivity gains in 2023 by optimizing the company’s global manufacturing footprint and distribution network.
However, the company is wrestling with rising costs for commodities and unfavorable currency effects related to the strength in the U.S. dollar. Another potential headwind lies in the firm’s exposure to agricultural cost inflation.
Nonetheless, Pepsi is on track to increase sales 10% this year, up from the initial forecast of 6%. This follows a 14% jump in sales in 2022. Even so, the stock has become cheaper this year and is now trading just above the 52-week low.
As noted in the previous section, in terms of price to earnings, Pepsi trades significantly below the 5-year average for the stock. The 5-year PEG ratio is also well below the historic average for that metric.
Weighing all of these factors, I rate Pepsi as a BUY.
I do not hold a position in Pepsi, but I intend to initiate a position in the stock by month’s end.
Let me add that for those that believe stocks like Pepsi offer little growth, consider the following: the 5-year total return for PEP, as of 10/10/23, is 71.97%. The 5-year total return for VOO, an index ETF that tracks the S&P 500, is 63.93%.
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