Pepsi reported 4.9% of organic revenue growth well ahead of consensus +3.2% outlook, bringing the year-to-date growth to 3.4%. Core EPS (ex FX) grew 9% y/y, while reported EPS grew 18%. Both gross and operating margins contracted this quarter, impacted by higher transportation and commodity (aluminum) costs and additional advertising and marketing expenses. This is a continued trend started earlier this year. A lower tax rate lifted net income by ~$0.07/share vs expectations. North America Beverages improved sequentially, with volume +1% and price +1.5%, the first positive volume growth since 4Q16.
The company raised its 2018 revenue guidance, expecting organic sales to be at least 3% (from ~2.3% before). But reported EPS guidance was lowered by 5 cents due to worse negative FX impact. The CFO replied to a question during the call regarding cannabis, shutting down rumors of entering the cannabis business with cannabis infused drinks. Sadly, this was Indra Nooyi’s last call as CEO, as she is retiring, and a new CEO will lead the company starting tomorrow.
No change to our position size (2.11%) or price target ($123) at this time.
Pepsi gross margin (left graph) recent quarterly trends. Right graph: historical and estimated (2018-2019: 2 bars on the right) annual operating margins:
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