PepsiCo (PEP, Financial) has been playing well in the beverage industry and has provided a decent return to its investors over the years. 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. This year poses great opportunities for Pepsi. 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.
PepsiCo achieved strong financial performance in the third 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.
“We are pleased with our performance for the third quarter of 2015. Despite ongoing volatility in many of our key international markets, we delivered strong organic revenue growth, gross margin expansion and double-digit core constant currency EPS growth. Based on our year-to-date results and our outlook for the remainder of the year, we are increasing our full-year core constant currency EPS growth target to 9 percent,” said Chairman and CEO Indra Nooyi.
Third quarter results:
- Organic revenue grew 7.4%.
- Reported net revenue decreased by 5%.
- Core gross margin and core operating margin expanded 120 basis points and 60 basis points.
- Reported gross margin expanded 115 basis points while reported operating margin declined 785 basis points.
- Core constant currency operating profit increased 12%.
- Company’s core effective tax rate was 24.6% during the quarter, (which was 24.2% in the prior-year quarter).
- Core EPS was $1.35 and reported EPS was 36 cents during the third quarter.
2015 guidance and outlook
The company expects the following:
- Productivity savings of approximately $1 billion.
- Net capital spending to be around $3 billion.
- The company expects to return around $9 billion to shareholders through dividends of approximately $4 billion and share repurchases of approximately $5 billion.
- Over $10 billion in cash flow from operating activities and more than $7 billion in free cash flow.
- EPS growth target of about 9%.
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.
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.
On a concluding note
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.
Pepsi is also 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, Pepsi 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, Pepsi 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. Pepsi 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 is taking responsible pricing actions, tightly controlling costs, and optimizing 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.
Disclosure: I do not hold any position in the company.
