Key takeaways:
Current price: $136 Price target: $153
Position size: 1.94% 1-year performance: -6%
Overall Pepsi delivered a good quarter with sales beating expectations in a market still impacted by Covid disruptions (away-from-home channels). The stock is not reacting positively however as guidance for 2021 implies flat cash flows from 2020, and as the company focuses on repaying debt and spending more in capex, rather than share repurchases.
- Organic sales growth of +5.7% (an acceleration from the 4% last quarter) – to end the full year organic growth at +4.3%. This is above competitor Coke who had -3% organic growth – a proof of PEP business model resiliency
- Sales came above consensus of 4.3% – driven by volume and price/mix equally
- Consumption at home remained strong throughout the quarter, but pressure remains in the foodservice channels.
- Both snacks and beverages grew mid-single digits
- North America grew +5% and International +6%
- Overall profits increased 6% even with Covid-related costs:
- Frito-Lay NA: decline due to Covid charges
- Quaker Foods: profitability increased due to better revenue and productivity savings but also lower advertising expenses
- Pepsi Beverages NA: profitability increased due to better revenue and productivity savings but also lower advertising expenses, and lower commodity costs
- Latin America & Europe: FX impacted the cost of commodities and negatively impacted profits
- Africa. Middle East & South Asia: profits growth driven by revenue growth and productivity savings, as well as the acquisition of Pioneer Foods
- Asia Pac, Australia/NZ and China: growth from productivity savings and revenue growth
- Bang Energy Drinks will no longer be distributed by Pepsi starting in Oct 2023
- Gatorade Zero is now a $1B in sales brand
- Covid had an impact on snacking on the go (impulse buy at convenience stores), that was high volume, high margin business. Now people take breaks at home, so Pepsi is selling more multi-pack, small portion format snacks
- 2021 guidance:
- Organic sales growth expected in the mid-single digits
- High-single digits EPS growth
- Cash flow outlook no longer provided
- Dividend increase of 5% (total of $5.8B), share repurchase of $100M (vs. $2B in 2020)
- Focus on capex and debt reduction to keep rating vs. buyback this year
- Capex spending used to be around 5% of sales, now will run towards 6% for a couple of years
- expand its digitalization of supply chain and selling system and IT
- increase capacity
- automation
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