PepsiCo (PEP) released earnings today, and the Street appeared to be pleased, pushing the stock more than 2% higher at the time of writing. As a result, PEP has reached a new 52 week high ($69.65), which is long awaited by investors who have watched their investment underperform the major indices and competitors like Coca-Cola (KO) and Dr. Pepper Snapple Group (DPS) over the past 12 months.
Across the board, things look pretty solid: revenues came in right around $12 billion (5% on an apples-to-apples comparison), with organic volume growth of 2% for snacks and North American beverages, which has been a focal point for the company as of late.
Quaker Foods continues to struggle, with revenues declining and operating profit only appearing stronger (really due to an inventory accounting change); thankfully, this is a small part of the business, and accounted for roughly 5% of revenues in the quarter.
FLNA continues to pull its weight as the largest division, bringing in $2.9 billion in revenues and $774 million in operating profit (up 6%) in Q1. Key performers include mid-single digits from Lay’s and double digit growth from Ruffles and the Sabra JV.
As I’ve noted previously, the Sabra JV is part of the “better-for-you” growth strategy (goal is $30B in revenues from “better-for-you” by 2020) that will likely become the most memorable piece of Indra Nooyi’s tenure as CEO at PepsiCo. Continued strength from JV’s like Sabra and new acquisitions like Wimm-Bill-Dann are key to this strategy in the future.
One of the biggest positives that came out of the call (and partly why I think you’re seeing an increase in the price today) was the fact that management did not change guidance, suggesting that their original estimate of additional commodity cost for the year (8.5-9%, or $1.4-$1.6B) assumed at least some level of the cost inflation that has played out as of late. They also gave some granularity on those costs, saying that of the $18 billion in annual commodity costs, 80% is usually hedged, with no one commodity accounting for more than 10% of the total cost.
Previously, they had noted that they were worried about the consumer (high unemployment, etc), and would attempt to hold prices; now, they have decided that they will look to pass some of the price through (though not all), and cover the rest through productivity. CFO Hugh Johnson was on CNBC, and had this to say: “The challenge for us is to come up with package sizes and products and innovation that appeal to them such that they continue to buy our products even in the face of some of the economic challenges that they are running into; the good news is so far we’ve been able to do that successfully.”
Current earnings estimates from the company (a bit higher from analysts) imply EPS of $4.42-$4.46 per share for FY 2011, meaning PEP is currently trading at a forward P/E around 15.6x earnings. As I laid out in my value submission (here), were looking at long term growth of high single digits to justify this price; I think investors might be better off treading cautiously as they build a position in PepsiCo at this time.
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