PepsiCo Reports A Good Third Quarter

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Oct 10, 2014

The food and beverage giant PepsiCo (PEP, Financial) reported its third-quarter earnings on October 9, enthralling investors’ as both the top and bottom line exceeded analysts’ estimates. Investors were happy with the results in the face of an ongoing challenged macroeconomic environment driven by increased volatility in emerging markets and continuous sluggish demand in developed markets. During the conference call, CEO Indra Nooyi stated, “We achieved these results because our brands are strong, our product portfolio is on trend, our geographic footprint is broad and diverse, and we are executing well in the marketplace.” So let us step in to find out the major highlights of the third-quarter earnings which could be informative from the investment perspective.

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Growth in revenue and profits

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Within PepsiCo’s product segments, the company owns Frito-Lay and Quaker Foods in addition to its namesake Pepsi soda. Frito-Lay saw revenue growth of 3%, mainly due to volume growth and effective net pricing. On the other hand, Quaker Foods saw a drop in sales by 2% on lower volume. PepsiCo beverages’ revenue was flat compared to last year's similar quarter, with North America non-carbonated beverage consumption offsetting 1.5% decline in carbonated sparkling drink volume.

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Nevertheless, though not all the segments did extraordinarily well for PepsiCo, the company managed to report overall revenue of $17.2 billion, up 2% from the year-ago quarter. And the best part was that it edged above the $17.1 billion analyst consensus.

Driven by growth in revenue, net income came in at $2 billion, up 5% from the prior-year period which resulted in earnings per share of around $1.32 a share, up 7% from that reported last year. Excluding special items, the earnings came to $1.36 per share, beating the Street consensus by $0.07 per share.

Share repurchases to continue

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Earlier this year, PepsiCo’s management revealed that it would return approximately $8.7 billion to shareholders through a combination of dividends and share repurchases in 2014. Of this, PepsiCo plans to utilize $3.7 billion for dividend pay-outs and $5 billion for share repurchases – overall this represents a 35% increase in the total cash returns to the shareholders versus last year.

This shows that the company is financially strong enough to keep the investors’ rewarded even when it faces headwinds in the emerging markets, where it’s been able to continue with the success story.

Future outlook is firm

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Looking ahead to the rest of 2014, PepsiCo said on Thursday that it expects the full-year earnings per share to grow at the rate of 9%. This is remarkably higher to 8% earnings guidance provided by the company after the second quarter of 2014.

Based on the current foreign exchange market consensus, the company is expecting foreign exchange translation to have an unfavorable impact of 4 percentage points on full-year core EPS growth in 2014. Excluding such impact, organic revenue is expected to grow mid-single digits versus 2013, consistent with the company’s long term target.

The company is also targeting more than $7 billion as free cash flow from this fiscal year.

Final takeaway

As the revenue chart is climbing almost every quarter for PepsiCo, it might be concluded that the company is continuously registering growth in its line of business. Even slowdowns in macroeconomic factors are not strong enough to stop its growth, and thus, the company looks focused to improve shareholders’ returns in order to keep them interested in its stock. Let’s stay hooked on to PepsiCo, and watch out for the final quarter results of 2014 which should hopefully be better than what got reported this third quarter.