The Purchase, New York based snack and beverage giant PepsiCo (PEP) came out with some strong numbers and raised guidance for the full year as it reported its fiscal 2014 second quarter earnings on July 23. The company not only met, but also beat estimates, displaying great top line and bottom line figures, driven primarily by the success of its packaged foods division.
This better than anticipated performance is also helping the company to counter Nelson Peltz’s argument to split up the packaged food and the beverages businesses. Let’s take a peek into PepsiCo’s latest quarter.
Pepsi Vending Machine, Source: Flickr
PepsiCo’s 2Q 2014 Performance
For the second quarter of 2014, PepsiCo reported consolidated revenues of $16.9 billion, translating into a 0.5% year on year surge from last year’s $16.8 billion. Nevertheless, the figure was well above what the street was expecting -- $16.8 billion. What’s more important for the company was the organic growth that its food and beverage segments witnessed. While the global snacks division rose 5%, beverages were up 2%.
The business units continued to face few headwinds, such as the impact of fluctuation foreign exchanges and Vietnam re-franchising issue. Taking into account the effect of these headwinds, the performance of both the divisions got adversely impacted. During the quarter, PepsiCo continued to observe dwindling demand for its carbonated drinks as demand plunged 2% in North America, but compensated well by the packaged food sales.
In comparison to the top line, the bottom line fared better. The company reported net income of $1.98 billion and EPS of $1.29. But, the adjusted EPS came to $1.32, up 9% compared to the prior year period, beating analyst estimates of $1.23 a share. Next, moving on to the margins, PepsiCo’s operating margin showed no change at 17.1%. The company ended the quarter with free cash flows of $1.9 billion, and also announced to give back to the shareholders $3.7 billion in the form of dividends for the current year, and another $5 million through stock buy backs.
What else is going on?
The beverage giant had a good run during the three months period and now expects stronger numbers for the full year. The company raised its full year revenue guidance to $67.29 billion, 1% increase over 2013, and expects EPS to grow by 8% instead of the previously forecasted 7%. The quarter was characterized by strong packaged food sales and the management expects the division to benefit further as the company launches multiple new flavors under its Lay’s potato chips brand.
The 2Q performance also helped the company stand against the claim made by Nelson Peltz. Nelson, CEO of Trian Fund Management LP, is an activist investor and through his firm owns $1.3 billion of PepsiCo. For some time now he has been trying to convince PepsiCo management to separate the faster growing global snacks business and slower growing beverage business into two separate publicly traded companies. In Trian’s letter to the PepsiCo board, Nelson commented –
“PepsiCo has an amazing snacks business that has performed consistently well over many years. But we believe Frito-Lay could perform even better if standalone management were allowed to market, invest and make strategic decisions with no interference from corporate.”
Nelson believes it will be better for the company to split the businesses. However, PepsiCo management differs in its opinion and feels the two businesses together represent a strong company and it’s important to keep them together. PepsiCo CEO Indra Nooyi believes the company is doing just fine and the better than anticipated performance of the company provided a much needed support to the management, since they could show growth despite macroeconomic headwinds.
All in all, PepsiCo’s second quarter is giving a lot of hope for a great year. The management is positive about the company’s upside potential and analysts and industry experts are expecting even better numbers in the coming quarters.