Soft drinks have been a hit among people from all age groups. PepsiCo (PEP, Financial) has been playing well in the beverage industry. Over the years, this company has also provided a decent return to its valued investors. PepsiCo is one of the world's leading food and beverage companies with over $66 billion in net revenue in 2014 and a global portfolio of diverse brands. In 2013, PepsiCo ranked #1 on Core Brand's list of the most respected companies.
The company has a diversified line of products to offer to its consumers. With over 22 brands in its portfolio, PepsiCo's products are sold in more than 200 countries and territories around the world. Each of its brands generated more than $1 billion in estimated annual retail sales.
Disposable income has been rising all over the world, and this beverage giant has more room to grow in the near future. 2015 poses great opportunities for PEP. Its flagship brands include Quaker, Tropicana, Gatorade, AMP Energy, IZZE, Naked Juice, Propel, Mug, Frito-Lay and Pepsi-Cola and are engaged in making hundreds of enjoyable foods and beverages that are loved throughout the world.
Notably, in the second quarter, PepsiCo was once again the largest contributor to retail sales growth in the U.S., its largest market, among all food and beverage manufacturers, with over $400 million of retail sales growth in all measured channels.
Results Speak
Organic revenue grew 5.1%. Reported (GAAP) net revenue declined 6% reflecting a 10-percentage-point impact of adverse foreign currency translation.
Developing and emerging market organic revenue grew 11%. On a reported basis, developing and emerging market net revenue declined 13%, reflecting unfavourable foreign exchange translation, in particular, related to the Russian ruble, Venezuelan bolivar, euro and Mexican peso.
Core gross margin expanded 115 basis points during the present quarter. Reported (GAAP) gross margin expanded 105 bps. Core EPS during the second quarter was $1.32. Core constant currency EPS increased 11%. EPS increased 3% and was $1.33.
The company’s core effective tax rate was 26%, (which was 26.3% in the prior-year quarter). The reported effective tax rate was 26.1%, (which was 26.5% in the prior year quarter).
Core constant currency operating profit increased by 8%. Reported operating profit was even with the prior year and reflects unfavorable foreign exchange translation, restructuring charges and the mark-to-market net impact on commodity hedges.
Cash flow provided by operating activities was $2.8 billion year to date. Free cash flow excluding certain items was $2.1 billion year to date, an increase of 7% from the prior year period.
Projections for 2015
- The company expects to deliver approximately $1 billion productivity savings and $8.5 to $9 billion cash return to shareholders.
- Foreign exchange translation now expected to adversely impact core EPS by 11% points.
- PEP expects 8% (previously7%) core constant currency EPS growth target for 2015.
- Higher interest expense driven by increased debt balances.
- Effective tax rate to be around 25%.
- Net capital spending to be around $3 billion.
- The company expects to return a total of $8.5 to $9 billion to shareholders through dividends of approximately $4 billion and share repurchases of $4.5 to $5 billion.
- Productivity savings of approximately $1 billion.
- Foreign exchange translation expected to adversely impact core earnings per share by 11percentage points.
Opportunities in India
PepsiCo entered India in 1989 and, in a short period, has grown into one of the largest food and beverage businesses in the country. PepsiCo growth in India has been guided by its global vision of “Performance with Purpose.”
One of the largest U.S. multinational investors in the country, PepsiCo has been consistently investing in India and has built an expansive beverage and snack food business supported by 38 beverage plants and three food plants. PepsiCo and its partners recently announced an additional targeted investment of Rs.33,000 Crore in India by 2020 in the areas of product innovation, increasing manufacturing capacity, ramping up market infrastructure, strengthening the supply chain and expanding company’s agriculture program. PepsiCo India’s diverse portfolio includes iconic brands like Pepsi, Lay’s, Kurkure, Tropicana, Gatorade and Quaker. In two decades, the company has been able to organically grow eight brands that generate Rs.1000 crores or more in estimated annual retail sales and are household names, trusted across the country.
Emphasis
The company is currently focusing on the following:
- Innovation.
- Brand building.
- Marketplace execution.
- Pricing actions.
- Optimizing global sourcing.
It is on track to deliver the five-year, $5 billion productivity savings through 2019.
Focus on emerging markets.
PepsiCo and Starbucks Partnership
Starbucks (SBUX, Financial) and PEP have entered into an agreement for the marketing, sale and distribution of Starbucks ready-to-drink (RTD) coffee and energy beverages including Starbucks Frappuccino chilled coffee drinks, Starbucks Double Shot Espresso and Cream, and Starbucks Refreshers beverages in Latin America. The RTD coffee and energy beverage category in Latin America is an estimated $4 billion business and is projected to grow by 22% over the next five years.
The agreement leverages the respective strengths of Starbucks and PepsiCo to bring a carefully selected portfolio of Starbucks RTD coffee and energy beverages to consumers in Latin America unlocking new market opportunities for each company. Starbucks will provide coffee expertise and PepsiCo will sell and distribute Starbucks RTD coffee and energy beverages leveraging its expansive network and experience across the region. Together, both companies will continue to market, innovate and further develop the brand in Latin America.
“The North American Coffee Partnership is arguably one of the most successful joint ventures in the beverage industry, and with this new agreement, we bring more than 20 years of partnership success to a region where coffee is part of the culture,” said Laxman Narasimhan, CEO of PepsiCo Latin America. “Together, our highly talented and passionate teams will expand upon the vision set decades ago to create a new blueprint for continued growth in Latin America.”
(Source: Company’s Website)
On a concluding note
PepsiCo achieved strong financial performance in the second quarter. It delivered mid-single digit organic revenue growth, strong gross margin expansion and double-digit core constant currency EPS growth. Based on year-to-date results and positive momentum in the businesses, it is increasing its full-year core constant currency EPS growth target.
People are now much more health conscious as the rate of obesity is accelerating at a great pace. Sugar, being the most important ingredient of soft drinks, is the main contributor to obesity. Health consciousness has paved the way to a decline in the consumption of carbonated soft drinks and diet soda in the U.S. market. The only reason for this is health problems such as weight gain, poor dental health, diabetes and cardiovascular disease.
It is in talks to introduce a line of products with natural ingredients. Keeping in mind the current obsession of people to shift to all things healthy, PEP has decided to roll out healthier alternatives.
There is an indication that the company will keep its history of consistently increasing dividends. With the recent details of its financials, PEP is expected to quench the thirst of its consumers in times to come.
Over the past 10 years, PepsiCo has returned over $60 billion to shareholders in the form of dividends and share repurchases. The company expects to return $8.5 to $9 billion to shareholders in the form of dividends and share repurchases in 2015.
An increasingly evolving middle class, higher disposable incomes and changing lifestyles are key factors that will fuel growth of this company in the beverage industry. PEP offers constantly growing dividends with stable price appreciation.
Foreign exchange translation and transaction headwinds persist. But the company is taking actions to combat the current volatile macroeconomic environment. It reported impressive second quarter results. It is taking responsible pricing actions, tightly controlling costs, and optimizing our global sourcing to minimize and mitigate the impacts of the current foreign exchange challenges. It is taking initiatives to deliver attractive free cash flow growth and cash return to shareholders, and enhance returns on invested capital. I would recommend this beverage giant as a buy.
