Key takeaways:
· Diversified profile is proving its value: snacks/food growth helping offset some temporary beverages category weakness
· No change from 1Q20: 2020 guidance withdrawn given COVID-19 uncertainties, dividends and share repurchases remain
Current price: $137 Price target: $153
Position size: 2.23% 1-year performance: +1%
Pepsi released its 2Q20 earnings this morning. Organic sales of -0.3% beat consensus expectations of a 3% decline. Its Frito-Lay and Quaker Foods divisions experienced some nice volume growth (and some pricing in snacks), while beverages pretty much across the globe saw volume contraction due to lower on premise & convenience stores sales. For the year, margins might contract a bit from 2019 due to additional virus disruptions and investments in manufacturing automation and distribution systems. COVID related expenses were a 250bps drag on operating margins this quarter. Which mean that removing the COVID impact, operating margins would have improved 50bps y/y. Sales next quarter are expected to improve sequentially in the low single digits, which we view as positive given the current trend in COVID cases in the US (and we think the management team has included that into its guidance for the quarter).
During the call, the management team highlighted focusing on the following factors to assess the health of its markets:
· #1 overall mobility in the country
· #2 universe of stores that are opened (mostly in developing markets). They have observed that when the infection rate goes up in a developing country, there’s about 10% to 15% of the stores that close which drives a lot of the performance
· #3 where do people eat most of their meals (at home/outside)
· #4 income/unemployment/government help – no impact in the US yet but they have seen some impact in other countries
The e-commerce shift happened faster than they expected prior to COVID. To adapt, PEP worked with all retailers to keep its products in stock, favoring best-selling SKUs and eliminating smaller SKUs. Pepsi has also adjusted its delivery schedules. The company is not providing a 2020 outlook due to COVID-19 but has seen an improvement during the quarter in its business performance and channel mix. Overall we remain positive on Pepsi as a long-term holding in the portfolio.
Thesis on Pepsi:
- Global growth opportunity with about 40% of profits coming from outside the US. CSD is only 25% of sales (and Pepsi brand only 12%)
- Strong market share in high growth emerging markets where there is low penetration and rising per capita consumption
- Resilient snack business provides pricing power and visibility to future cash flows (more than half of sales are from snacks not beverages). CSD is only 25% of sales (and Pepsi brand only 12%)
- Several Great brands driving global growth: Frito Lay, Quaker, Gatorade
- Strong balance sheet and cash flows support a solid dividend yield and share buyback program
Tag: PEP
category: earnings
$PEP.US
Julie S. Praline
Director, Equity Analyst
Direct: 617.226.0025
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square
Suite 500
Boston, MA 02109