PepsiCo Inc. (PEP, Financial) reported earnings results on Monday that came in above what Wall Street analysts had expected. Even as Covid-19 impacted certain segments and geographies and caused an increase in costs, the company’s second-quarter results were still solid.
PepsiCo, which is among the first stocks I believe new dividend growth investors should buy, performed admirably under adverse conditions. Let’s take a deeper look at the company’s quarter.
Second-quarter earnings results
PepsiCo’s revenue declined 3% to just under $16 billion, but this beat what the market analysts had expected by $480 million. Adjusted earnings per share decreased 14% to $1.32, but topped estimates by 7 cents.
Organic revenue declined 0.3% primarily due to the impact of the ongoing Covid-19 pandemic. For the first half of the year, the company has organic revenue growth of 3.3%. Currency headwinds reduced revenue by 4% and earnings per share by 3%.
Organic sales for North American Beverages, PepsiCo’s largest division, were down 7%. This segment saw strength in stay-at-home consumption as consumers stocked up on products. E-commerce sales doubled in the U.S. as demand for beverages was still high.
However, this growth was more than offset by declines in sales in convenience, gas and away-from-home sales. This wasn’t exactly a surprising occurrence as consumers were under some sort of stay-at-home directives for much of the second quarter in North America. The company noted this channel has improved somewhat since the end of the second quarter.
Ready-to-drink coffee and enhanced water products were cited as a source of strength. Carbonated soft drinks also benefited from increased prices.
PepsiCo also noted its integration of energy drink maker Rockstar is nearing completion. The company plans to expand distribution or products nationwide. The company’s SodaStream brand had double-digit growth.
While beverage volumes were down 11% worldwide, food and snacks were a stand-out performer. Overall, volumes for this category increased 4%.
Frito-Lay North America had 3% volume growth, leading to 6% organic revenue growth as PepsiCo increased its market share in salty and savory snacks. Supplying evidence of this market share capture was a 10% growth in the Tostitos, Cheetos and Fritos brands.
Quaker Foods North America, PepsiCo’s smallest segment, experienced a 26% increase in volumes while organic revenue was up 23%. Even with supply constraints, nearly every brand showed growth. Results were aided by increased consumption of breakfast, snacks and dinner at home. Household penetration improved as well even as certain markets reopened restaurants. Demand has remained high even as stay-at-home orders have begun to be rolled back. This is a remarkable turnaround for Quaker Foods as this segment had been the weakest over the past several years.
Latin America sales dropped 17% to $1.6 billion as volumes for snacks were flat and beverages decreased 9%. Currency was a significant headwind for this region. PepsiCo maintained its market share in Brazil, but sales were greatly impacted by currency exchange.
Europe had 2% volume growth in both food and snack and beverages, but organic growth was still down 2.5% to $2.7 billion due to currency exchange. Germany was extremely strong with 18% revenue growth.
Africa, the Middle East and South Asia had a 7% decline in organic growth to $983 million, mostly due to a 26% drop in volumes for beverages. South Africa and Japan had solid growth during the quarter.
Asia Pacific, Australia, New Zealand and China had 15% revenue growth to $763 million as a 14% improvement in food and snack volumes offset an 8% decline in beverage volumes. PepsiCo saw market share gains in China, while Australia had strong sales growth.
Expenses in the quarter were up more $400 million on account of coronavirus-related costs. This drove a decline of 195 basis points in core operating margins of 15.8%. Without these costs, core operating margins would have been higher year over year.
The company’s balance sheet looks pretty strong. The company total current assets of $23.2 billion at the end of the quarter, including almost $9 billion in cash and equivalents. Total liabilities are nearly $77 billion, but just $6.6 billion of short-term debt.
PepsiCo once again declined to give detailed guidance for the year since the full impact of the Covid-19 pandemic is unknown. The company did say it expected to distribute $5.5 billion in dividends this year and repurchase $2 billion worth of stock. Currency exchange is expected to be a 3% headwind to revenue results for the year. Yahoo lists earnings per share estimates of $5.34 for 2020.
Final thoughts
PepsiCo’s second quarter was a mixed bag as food and snacks had solid gains while beverages saw a decline in volumes. Beverage volumes held up well in the stay-at-home channels, but the convenience store channels suffered from a lack of foot traffic. Not terribly surprising given the length of stay at home directives. Demand outside of this channel should provide evidence that results will improve under a more normal business environment. Food and snack gains were very encouraging and show the strength of the company’s diversified business model. PepsiCo has 23 brands that deliver more than $1 billion in annual revenues, providing the company with a wide moat to protect itself from difficult times.
PepsiCo also offers a 3% dividend yield, which, according to Value Line, is nearly in line with its 10-year average yield of 2.9%. PepsiCo has 48 consecutive years of dividend growth and raised its dividend by 7.1% for the June 30 payment.
The knock on PepsiCo, and one that has been the case for a while, is the valuation. At the current price of $137, shares trade with a forward price-earnings ratio of 25.7. The stock has traded with a five and 10-year average price-earnings ratios of 21.2 and 17.9.
Investors buying today are not getting a deal on shares of Pepsi, but they are getting shares of a company that operated quite well in probably the most difficult business environment since the Great Recession. The stock also offers a compelling yield. Investors looking for a strong option in the consumer staple section should consider buying PepsiCo even at the current valuation due to its business performance, dividend and brand power.
Disclosure: The author has a long position in PepsiCo.
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