Earnings Analysis PepsiCo, Inc. (PEP)
It is well known than Pepsi has been winning over Coca-Cola (KO) in blind taste tests conducted through the decades, including modern neuro-scientific tests. Yet people prefer Coke when they know what they are sipping. But there's more to PepsiCo than its cola. PepsiCo's Carbonated Soft Drinks share is only 40% of its business now (a 10% decrease in the last decade). The company's non-carbonated drinks range from Lipton tea to Tropicana and Naked labels. It is worth noting that of late Americans are also drinking less orange juice, which could be bad for PepsiCo's Tropicana label; the market's open interest in positions was recently at its lowest in 20 years.
Luckily for PepsiCo, over 40% of its revenues come from salt not sugar based items. Snacks marketed under Frito-Lay brands account for over 60% of American salty snack consumption. The company also has Good-For-You and Better-For-You portfolios with lower fat and increased nutrition options that include several Quaker brand foods aimed at health-aware customers.
Which company is doing better this earnings season: PepsiCo or Coca-Cola? We published our Q3 2013 earnings analysis of The Coca-Cola Company this week in Coca-Cola (NYSE:KO) Earnings Analysis: Is it going better with Coke? PepsiCo's earnings are the subject of this article.
Based on PepsiCo, Inc.'s preliminary financial results for the quarter ended 2013-08-31, we provide a peer-based analysis of the company (see the peer list at the end of this post). Our analysis is based on the company's performance over the last twelve months (unless stated otherwise). The table below shows the preliminary results along with the recent trend for revenues, net income and returns.
|Quarterly (USD million)||2013-08-31||2013-06-30||2013-03-31||2012-12-31||2012-08-31|
|Revenue Growth %||0.6||33.6||(37.0)||19.8||1.2|
|Net Income Growth %||(4.7)||86.8||(35.3)||(12.7)||27.8|
|Net Margin %||11.3||11.9||8.5||8.3||11.4|
|ROE % (Annualized)||33.9||35.5||19.1||30.2||36.1|
|ROA % (Annualized)||10.0||10.6||5.7||8.9||10.4|
Some Operating Leverage
PepsiCo, Inc.'s current Price/Book of 5.7 is about average in its peer group. The market expects PepsiCo to grow at about the same rate as its chosen peers (P/E of 19.4 compared to peer average of 20.0) and to maintain the peer average return (ROE of 30.3%) it currently generates.
Our analysis shows that the company's average net profit margins of 10.0% and relative asset efficiency (asset turns of 0.9x compared to peer average of 0.7x) give it some operating leverage. PepsiCo's net margin has increased 0.6 percentage points from last year's low but is still below its five-year average net margin of 11.1.
Questions about Long-term Strategy
It seems that the market has some questions about the company's long-term strategy because though PepsiCo's revenues have grown faster than the peer average (14.8% vs. 6.1% respectively for the past three years), the market only gives the stock an about peer average P/E ratio of 19.4.
PepsiCo's annualized rate of change in capital of 27.1% over the past three years is greater than the peer average of 4.8%. However, this investment level has only generated a peer average return on capital of 14.8% averaged over the same three years. This average return on an above average capital investment suggests the company is overinvesting.
Understatement of Reported Net Income?
PepsiCo's net income margin for the last twelve months is around the peer average (10.0% vs. average of 10.2%). This average margin and relatively conservative accrual policy (4.9% vs. peer average of 2.7%) suggests possible understatement of its reported net income.
PepsiCo's accruals over the last twelve months are positive suggesting a buildup of reserves. In addition, the level of accrual is greater than the peer average -- which suggests a relatively strong buildup in reserves compared to its peers.
Trend Charts for PepsiCo, Inc.
Peers used for PepsiCo, Inc. Earnings Analysis
The following peer-set was used: The Coca-Cola Company (KO), Nestle S.A. Sponsored ADR (NSRGY.PK), Unilever NV ADR (UN), Mondelez International, Inc. Class A (MDLZ), Monster Beverage Corporation (MNST) and Dr. Pepper Snapple Group, Inc. (DPS).