PepsiCo’s stock price (NYSE:PEP) has acted quite peculiar in the past couple of months. After hitting the mid-60s in early 2010, the stock was stagnant and traded in a tight range for the next twelve months. In early March of this year, however, it started trending upwards, peaking above $70 a share towards the end of May. Since then, the stock has consistently traded lower, and is down more than 10% over the past three months.
Today, the stock pulled back more than 1%, despite 2%+ gains for the major indices. Management (speakers included Hugh Johnston, PepsiCo CFO and John Compton, CEO of PepsiCo American Foods) was speaking at the Barclay’s Back to School Consumer Conference, so I felt it would be a good idea to listen to what they had to say about the current state of the consumer and the global economy from their perspective, and how they feel about the business heading into the end of fiscal 2011. Here are some of the notes from the conference:
As management has stated in the past, they are focusing on nutritious product lines (known as “good for you”) to meet growing demand in these categories; currently, their goal is $30 billion in revenues from this category by 2020. As noted by Hugh Johnston, this category currently accounts for more than 20% of company sales today, compared to roughly 11% in 2000.
Despite the current short term issues coming from a mix of rising commodity costs and a weak developed market consumer, it is important to step back from the noise and look at the numbers; as noted by Mr. Johnston, “Over the past five full years, we delivered double-digit core net revenue and core operating profit growth, high single-digit core EPS and management operating cash flow growth. We increased dividends per share 13% on a compound annual basis, and we returned $29 billion to shareholders through dividends and share repurchases.” Considering the economic backdrop, those results are worth a second look; why anybody would by Treasuries yielding less than PEP’s dividend (which is continuously growing) is beyond me.
John Compton started his portion of the conference by pointing out a little known fact for many who just know about soda; PepsiCo is also the proud owner of the largest food brand in the world: Lay’s, with more than $9 billion in annual sales. As a whole, PepsiCo’s snack business makes, distributes (largest DSD system in the world), and sells more than $30 billion a year, and has grown revenues and profits around 8% per annum in the past five years.
In addition, this business is vertically integrated, and holds a commanding share position in many key markets. Here are some of the figures from Mr. Compton: “If you look in Argentina, we have over an 80 share. If you look into markets like Mexico and Turkey, we have over a 70 share. If you look at the United States and Canada, we have a mid 60s share. If you look at emerging markets like Brazil, we have a 50 share. Versus our nearest global competitor, we have over a 10x relative market share advantage, so I think this is a pretty good position from which to grow.”
Despite these strengths, PepsiCo snacks must still fight to maintain share; as Mr. Compton noted, “Historically, our ability to predict that elasticity was a fairly tight standard deviation in terms of what we knew was going to happen in the marketplace. Most recently, the elasticity’s have been higher, and they have been higher largely on the promoted side, not on the everyday price side. So we have some fine tuning to do to go back and re-look some promoted price points.” As I noted in my recent Campbell’s Soup article (and have previously touched on when discussing the cereal aisle), consumers have grown accustomed to the promotional offerings, and are extremely sensitive to price. With private label continually improving their product lines, many have found a reasonable alternative, and will switch to a substitute if pushed away by uncompetitive pricing. Much like Campbell’s, Kellogg’s, and General Mills, PepsiCo has their work cut out for them when it comes to balancing between price (driven by rising costs) and the premium they can obtain from brand equity.
In his closing remarks before questions, Hugh Johnston made a statement that (I believe) captures the reality of the long-term economic position for PepsiCo in a nutshell:
“The environment we currently operate in will not remain challenged forever. Commodity markets will rebalance and the developed market consumer will recover. The decisions that we make today will determine how we'll participate in that future recovery.
We have a fantastic portfolio and we worked hard over the past ten years to get our portfolio to this point… Our portfolio is positioned in attractive, global growth segments.
We believe the mix of our businesses across segments and geographies will produce consistent solid revenue growth, attractive and expanding margins… and strong cash generation and returns to shareholders.”
With a dividend yield 130 basis points above 10-year Treasuries, PEP continues to look like a strong addition to the intelligent investor’s portfolio.
About the author:
As it relates to portfolio construction, my goal is to make a small number of meaningful decisions. In the words of Charlie Munger, my preferred approach is "patience followed by pretty aggressive conduct." I run a concentrated portfolio, with a handful of equities accounting for the majority of my portfolio (currently two). In the eyes of a businessman, I believe this is adequate diversification.