When the beverage giant, PepsiCo (PEP, Financial), posted its results on February 11, all eyes were glued to the numbers to find out if it was able to sustain its growth amid existing headwind linked to foreign currency exchange impact in several international locations. Though there was a dip noticed in earnings and revenue in the fourth quarter of the fiscal year, the management looked upbeat going forward, and there was solid growth witnessed in the snacks business line which clearly offset the revenue decline in the carbonated drinks section. Let’s dig in deeper to get to the major highlights of the final quarter of FY2014 and whether PepsiCo stock is a good investment option after its earnings release.
The mixed number set
Just a day after rival Coca-Cola (KO, Financial) came out with its fourth-quarter numbers, PepsiCo announced its results which were impressive since they were able to beat the Street expectations both in terms of top and bottom line estimates. Though revenue was impacted by the foreign exchange factor which caused a 1% dip year over year to $19.95 billion during the quarter, it surpassed all predictions who were expecting revenue to be around $19.78 billion.
Net income was also affected negatively by seven percentage points due to strengthening of the dollar falling to $1.31 billion in the quarter, from $1.74 billion reported a year ago. But PepsiCo maintained increase in prices in regions where it faced the pressure of inflation to maintain revenue and prevent its fall beyond certain limits.
Notably, while PepsiCo showed a 25% fall in profits this quarter Coca-Cola exhibited around 55% plunge in profits, which is actually a huge decline in profitability for the latter. Hence, it can be easily concluded that PepsiCo’s fourth quarter was a better one and the company does hold a lot of promise going forward.
The diversification of business has proved to be the key parameter behind the continued good performance being delivered by the company with the snacks section growing in popularity and offsetting the declining sales in the sparkling drinks section being witnessed largely in the U.S. Even in the final quarter, the snacks section contributed largely to the revenue rising about 3.5% to $4.37 billion, thanks to the firmer volumes sold and improved price tags of the product-line at the Frito-Lay North American division. PepsiCo further noted that, while North American non-carbonated beverage volume rose 4% during the quarter, soda volumes fell about 2% during the same quarter.
Earnings per share stood at $1.12 a share excluding the foreign currency impact and other special items, exceeding the Street expectations by about $0.04 a share. However, the total earnings were grossly affected by the $105 million charge on its Venezuela business after the company adopted the exchange rate of 12 bolivares to the dollar to combat the effect of inflation.
Future prospects seem to be riding high
The company has reiterated that it will continue with the price increase strategy to track inflation, in whichever geographical region it needs to implement the same. For example, the company is expecting to significantly increase prices on its products in Latin America in the upcoming quarters. Though the company hedges against all major currencies, it becomes highly expensive to maintain such hedges after a couple of months. And since inflation will remain a headwind going forward, the company feels that this is the best strategy it can take at this juncture.
Also, the company has not ruled out getting into a string of acquisitions in the near future. As it has extensively reduced the operational costs in the past two years, this has led to improved gross margins for the past ten quarters at a stretch. And now, PepsiCo wants to divert its attention towards possible acquisitions down the road.
Stock remains attractive for investors
Soon after the results were out, the stock reacted positively and gained 2.5% at $100.40. Besides the better-than-expected results, the company also shared its plan to return $8.5-$9 billion to shareholders in the form of buyback and dividend payout schemes in 2015. This reflects that the company has enough cash to pay to its shareholders and to keep them contended at the end of the day. Besides this plan of action, the company has also shared its interest in buying back up to $12 billion in stock by 2018.
This information serves as icing on the cake for the interested investor community, which was delighted when the company declared the dividend hike by 7.3% to $2.81 per share during the final quarter. With the snacks business growing to become a bright spot for PepsiCo, it’s been helping the stock to outperform immediate rivals such as Coca-Cola.
The road ahead
PepsiCo surely has roadblocks to face in the upcoming fiscal year with existing headwinds like inflation and a strong dollar, but the management is adopting comparative pricing across geographies to tackle such pressure. Nevertheless, PepsiCo’s management remains confident that the company will see greener pastures going forward and that the stock will trend higher in the upcoming quarters. Let’s stay tuned and keep watching.
