Mexican 'Fat' Tax Is Worrisome For PepsiCo

Oct.23.13 | About: PepsiCo Inc. (PEP)

Overall, PepsiCo (NYSE:PEP) has had a fine 2013. The company has been seeing revenue growth where it needs it, mostly in Latin America and Eastern Europe, which has helped offset declines in key North American markets. However, volume growth has been elusive. PepsiCo has a long history of dividends and of dividend-growth, with the 2013 increase to $0.57 per quarter marking the 41st year of annual dividend increases. At current prices, PepsiCo yields around 2.70%.

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Q3 2013 Overview

  • Reported EPS: $1.23 +1.5%

  • Beverage Volumes: +1%

  • Snacks Volumes: +3%

  • Net Revenues: +1.5%

  • Currency Neutral Net Revenues: +2.5%

  • Organic Revenue Growth: 3%

  • Reported Operating Profit: +6%

  • Adjusted Operating Profit: +8%

Overall, PepsiCo's results met expectations. The company saw impressive revenue growth in Latin America, Brazil, and other emerging markets. However, North America remained a drag.

In general, the beverage segment has been more of a "cash cow" with more North American exposure, while the snacks division has more of an international growth focus.

That being said, both segments had their areas of both strength and weakness in Q3. Frito-Lay North America saw moderate revenue growth of 5%, which compares favorably to the 2% decline posted by the PepsiCo Americas Beverages segment. PepsiCo's Quaker Foods NA segment posted flat growth and was by far the weakest of PepsiCo's snacks divisions. Latin America continued to be a driver of growth for PepsiCo, posting 9% revenue growth and 23% increase in operating profits.

In Europe, PepsiCo fared well considering the macro environment. Operating profits were flat while revenues increased 3%. Much of this increase was due to higher prices, but snacks volumes did increase slightly.

An area of concern would have to be the Asia, Middle East & Africa segment, which posted a 3% decline in revenues. In the conference call, CEO Indra Nooyi noted that the company faced "significant volatility experienced in a couple of our AMEA region markets." In addition, in the Q&A round, the company noted that local competitors are adding pricing pressures, which has exacerbate the volatility.

Russian assets continue to outperform

Of note, Russia was an area of strength for PepsiCo, with the company now the number two food and beverage supplier in that country. PepsiCo noted in the conference call that it now has the scale necessary to increase market share despite fierce competition.

Mexican "Fat" tax is worrisome

Another interesting trend I noticed in PepsiCo's results was that its snacks division was clearly outperforming the beverages segment. Frito-Lay, which is mostly junk food and similar items, was a key driver of growth in Latin America and North America.

With that being said, a proposed new law in Mexico is quite worrisome. On October 18, the WSJ reported that Mexico's lower house of Congress was preparing to slap on a 5% excise tax on high-calorie foods. This tax would have an impact on many junk food items sold in Mexico, including sugary soft drinks, PepsiCo's bread and butter. While arguably other companies, such as Coca-Cola (NYSE:KO) and Swiss giant Nestle (OTCPK:NSRGY), will be more affected, PepsiCo may still suffer as a result. According to the WSJ article, the new tax is in addition to another proposed tax specifically on soft drinks. The other proposal would add around 1 Mexican peso (or $0.08 USD) per liter to the price of soda. Needless to say, PepsiCo would not benefit if this proposal becomes law.


Overall, PepsiCo shareholders should be happy about PepsiCo's YTD performance. The company has staged in remarkable turnaround, with impressive YTD EPS growth. However, the company is facing headwinds in emerging markets, as shown by its lackluster volume growth.

Disclaimer: The opinions in this article are for informational purposes only and should not be construed as a recommendation to buy or sell the stocks mentioned. Please do your own due diligence before making any investment decision.

Disclosure: I am long KO. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.