Snack and beverage giant PepsiCo Inc. (PEP, Financial) reported earnings results yesterday that came in well ahead of what Wall Street analysts were predicting. The company saw high rates of organic growth in nearly every business and every region that it has a presence.
The company also raised its guidance for the remainder of the year. In addition, PepsiCo has a solid yield and a long track record of dividend growth. All of these factors led me to add to my position in the name at around $153.
Let’s more closely examine why it was a good time to add more PepsiCo to my portfolio.
Earnings highlights
PepsiCo released second-quarter earnings results on July 13. Revenue grew 20.5% from the prior year to $19.22 billion, which was $1.27 billion above estimates. There are just a handful of quarters in the company’s history that can top this amount. Adjusted earnings per share of $1.72 compares very favorably to the prior’s year result of $1.32 and was 16 cents better than expected.
Organic growth was 12.8% for the quarter compared to consensus estimates of 7.6%. Overall, food and snack volumes were flat, while beverages improved 20%.
Looking at segments and regions, Frito-Lay North America grew 6% organically as volumes were up 1%. Key brands, such as Lays, Doritos and Cheetos, all took market share. Smaller brands, such as Sun Chips and PopCorners, also performed well. The convenience and gas channels, which were very weak in the same period of last year due to less travel related to the Covid-19 pandemic, were higher by double digits.
PepsiCo Beverages North America was up 21% with a 15% increase in volumes. Growth was seen in carbonated drinks, teas and juice and in brands such as Mountain Dew and Starbucks. As with Frito-Lay, the convenience and gas channels were higher by more than 10%. Foodservice was also a bright spot.
Quaker Foods North America fell 7%, driven by a 12% decrease in volumes. This segment did add to its market share gains made last year in at-home breakfast, snacks and meals.
Latin America gained 16%, mostly due to a double-digit improvement in beverage volumes. Europe increased 15%, aided by a 17% gain in beverage volumes. France, Spain and Germany were up double digits. Africa, thr Middle East and South Asia increased 15% and Asia Pacific, Australia, New Zealand and China grew 6%. Volume gains for beverages were up 34% and 23%, respectively, due to acquisitions, but these regions still saw impressive organic growth rates. Russia, Egypt, India and South Africa were all singled out as bright spots.
Following second-quarter results, PepsiCo offered revised guidance for the year. The company expects organic revenue growth of 6%, up from its prior forecast of a mid-single-digit gain. The company also guided toward earnings per share of $6.20 for 2021. This would be an 12% increase from 2020 and above the company’s initial guidance of mid-single-digit earnings per share growth.
Takeaways and valuation analysis
It is true that PepsiCo was going up against easy comparable numbers. After all, the second quarter of 2020 was the only quarter last year to show a year-over-year decline on both the top and bottom lines. Organic growth was in the double digits. Again, this was against low comparable figures, but still massively outperformed what analysts had anticipated.
And with the operating environment completely different than the same time last year, analysts rightly expected the company to produce strong numbers. Even meeting expectations would have resulted in one of the better quarters of the past few years for PepsiCo.
The company exceeded estimates by a wide margin, delivering what was an excellent all-around quarter. Beverages was the key driver of growth in the quarter, helping to offset flat sales in the food and snack category. PepsiCo also saw almost every key market post double-digit organic sales growth, showing that growth was very much broad based.
Some of this growth was due to the reopening of economies, but also because consumers were reaching for PepsiCo products over competitors. For example, the company stated that its North American business saw gains in market share at the expense of competitors of all stripes, including chief rival the Coca-Cola Co. (KO). As a result, the operating margin for this segment was up more than 400 basis points.
It was just a few years ago that the North American Beverages segment was struggling and offsetting the strength in food and snacks. Now, it appears that beverages are fueling a good portion of the gains. This highlights one of the key advantages of PepsiCo’s business model in that sales are generated from a mix of food, snacks and beverages, with slightly higher percentage coming from the former.
The only segment to decline versus the prior year was Quaker Foods as this business faced extremely tough comparisons to the prior year as consumers ate more meals at home because of social distancing requirements and lockdown restrictions. Better yet, this is the smallest segment within PepsiCo as the $575 million of revenue generated during the quarter represented just 3% of the company’s total. A further cooling off of this business won’t be much of a headwind to overall results, especially if the other businesses and regions perform well.
Shares of PepsiCo are higher by just 4.2% year to date compared to a 16.4% gain in the S&P 500 Index. Investors have turned from the more defensive portions of the market to the higher growth names. This leaves investors an opening to add more of a quality name that hasn’t seen its share price become overextended.
Even though PepsiCo trades at nearly 25 times forward earnings estimates, which is a premium to the 10-year average price-earnings ratio of 20, the stock doesn’t look very expensive relative to its intrinsic value as calculated by GuruFocus.
PepsiCo has a GF Value of $146.65. Using my purchase price, the stock has a price-to-GF Value ratio of 1.04. The stock earns a rating of fairly valued from GuruFocus.
Final thoughts
One of my investment criteria is to purchase shares of companies that are outperforming expectations. Companies that can top what the market expects of them and also provides a raise in guidance move to the top of my shopping list. And this is just what PepsiCo did. The company greatly surpassed even heightened expectations and still raised its guidance for revenue and earnings per share.
The company was able to do so because it is seeing a higher share of the market in a number of categories. This is a sign of company strength.
The stock is trading only mildly above its intrinsic value as calculated by GuruFocus, even as PepsiCo can be considered expensive relative to its historical averages.
Aside from its business model, my main attraction to PepsiCo is its dividend growth streak. The stock offers a yield of 2.8%, which is more than double the average yield of the S&P 500 Index. The company also has a dividend growth streak that stretches back 49 years. There are only 30 or so companies with a longer dividend growth streak in the entire market place.
Combining the most recent quarterly performance and dividend growth history with a reasonable price-to-GF Value made purchasing more shares of PepsiCo an attractive opportunity. I am willing to pay a near fair value price for a company that just beat estimates and raised its guidance for the year.
