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Summary

  • Revenue was flat from last year.
  • Earnings per share increased 15% on cost control.
  • The stock is fairly valued at this point in time.

The last time I wrote about PepsiCo Inc. (NYSE:PEP), I stated:

"Due to the overbought technicals, fair valuation on next year's earnings, and low dividend yield I'm not going to be pulling the trigger on a batch of this particular name right now."

Since that article was published, the stock is flat while the S&P 500 (NYSEARCA:SPY) was also flat. Pepsi is a global food and beverage company which operates four business units: PepsiCo Americas Foods, PepsiCo Americas Beverages, PepsiCo Europe and PepsiCo Asia Middle East and Africa.

The company reported earnings before the market opened on 17Apr14, and on the surface the results were great with the company reporting earnings of $0.83 per share (beating estimates by $0.08) on revenue of $12.62 billion (beating estimates by $190 million). What I'd like to do at this time is delve into the weeds and pick out some highlights from different portions of the report to see if the stock is worth buying at the present time.

Segment Revenue

Segment Revenues (millions)

1Q14

4Q13

1Q13

Q/Q

Y/Y

Frito-Lay North America

$ 3,219

$ 4,247

$ 3,123

-24%

3%

Quaker Foods North America

$ 634

$ 797

$ 634

-20%

0%

Latin America Foods

$ 1,338

$ 2,818

$ 1,367

-53%

-2%

PepsiCo Americas Foods

$ 5,191

$ 7,862

$ 5,124

-34%

1%

PepsiCo Americas Beverages

$ 4,426

$ 5,982

$ 4,420

-26%

0%

Europe

$ 1,961

$ 4,339

$ 1,942

-55%

1%

Asia, Middle East & Africa

$ 1,045

$ 1,935

$ 1,095

-46%

-5%

Total Revenue

$ 12,623

$ 20,118

$ 12,581

-37%

0%

There was nothing really too exciting about the segment revenues other than PepsiCo Americas Foods, which increased by 1%, and overall revenue was flat year over year. PepsiCo Americas Foods accounts for 41% of all revenue.

Income Statement

Income Statement (millions)

1Q14

4Q13

1Q13

Q/Q

Y/Y

Total Revenue

$ 12,623

$ 20,118

$ 12,581

-37%

0%

Cost of Sales

$ 5,747

$ 9,565

$ 5,834

-40%

-1%

Selling, general and administrative expenses

$ 5,048

$ 8,120

$ 5,066

-38%

0%

Amortization of intangible assets

$ 21

$ 35

$ 23

-40%

-9%

Operating Profit

$ 1,807

$ 2,398

$ 1,658

-25%

9%

Interest Expense

$ (201)

$ (269)

$ (214)

-25%

-6%

Interest Income and other

$ 10

$ 35

$ 27

-71%

-63%

Income before income taxes

$ 1,616

$ 2,164

$ 1,471

-25%

10%

Provision for income taxes

$ 389

$ 410

$ 386

-5%

1%

Net income

$ 1,227

$ 1,754

$ 1,085

-30%

13%

Less: net income attributable to noncontrolling interests

$ 11

$ 12

$ 10

-8%

10%

Net income attributable to the company

$ 1,216

$ 1,742

$ 1,075

-30%

13%

Avg. common shares outstanding

1,540

1,552

1,563

-1%

-1%

Net income per common share

$ 0.79

$ 1.12

$ 0.69

-30%

15%

On the income statement, there was a 9% increase in operating profit due in large part to the net impact of mark-to-market gains on commodity hedges and restructuring costs. There was a 63% decrease in interest income and income before taxes increased 10% from last year. Net income proceeded to increase by 13% from last year. Net income attributable to the company increased 13% leading to a 15% increase in earnings per share from last year. However, earnings compared to last quarter decreased 30% and is a seasonality effect as the same thing happened from 4Q12 to 1Q13.

Balance Sheet

Balance Sheet (millions)

1Q14

4Q13

1Q13

Q/Q

Y/Y

Cash and cash equivalents

$ 9,839

$ 9,375

$ 9,375

5%

5%

Short-term investments

$ 247

$ 303

$ 303

-18%

-18%

Accounts and notes receivables

$ 7,262

$ 6,954

$ 6,954

4%

4%

Raw materials

$ 1,794

$ 1,732

$ 1,732

4%

4%

Work in process

$ 235

$ 168

$ 168

40%

40%

Finished goods

$ 1,719

$ 1,509

$ 1,509

14%

14%

Inventories

$ 3,748

$ 3,409

$ 3,409

10%

10%

Prepaid expenses and other current assets

$ 2,189

$ 2,162

$ 2,162

1%

1%

Total current assets

$ 23,285

$ 22,203

$ 22,203

5%

5%

Property, plant and equipment, net

$ 18,129

$ 18,575

$ 18,575

-2%

-2%

Amortizable intangible assets

$ 1,593

$ 1,638

$ 1,638

-3%

-3%

Goodwill

$ 16,310

$ 16,613

$ 16,613

-2%

-2%

Other nonamortizable intangible assets

$ 14,053

$ 14,401

$ 14,401

-2%

-2%

Nonamortizable Intangible Assets

$ 30,363

$ 31,014

$ 31,014

-2%

-2%

Investments in noncontrolled affiliates

$ 1,890

$ 1,841

$ 1,841

3%

3%

Other assets

$ 2,233

$ 2,207

$ 2,207

1%

1%

Total assets

$ 77,493

$ 77,478

$ 77,478

0%

0%

Short-term obligations

$ 7,832

$ 5,306

$ 5,306

48%

48%

Accounts payable and other current liabilities

$ 11,625

$ 12,533

$ 12,533

-7%

-7%

Income taxes payable

$ -

$ -

#DIV/0!

#DIV/0!

Total current liabilities

$ 19,457

$ 17,839

$ 17,839

9%

9%

Long-term debt obligations

$ 24,240

$ 24,333

$ 24,333

0%

0%

Other liabilities

$ 4,811

$ 4,931

$ 4,931

-2%

-2%

Deferred income taxes

$ 6,092

$ 5,986

$ 5,986

2%

2%

Total liabilities

$ 54,600

$ 53,089

$ 53,089

3%

3%

From a balance sheet perspective, short-term investments decreased 18% from last year while work in process increased 40%, and finished goods increased 14%. Inventories increased 10% as a result and total current assets increased 5% from the prior year. Nonamortizable intangible assets decreased 2% on the whole and total assets were left flat from the prior year.

From a liability perspective, short-term obligations increased a whopping 48% which made total current liabilities increase 9% from last year. Total liabilities increased 3% as a result of the aftermath.

Conclusion

The company reported earnings which were 15% higher than a year before on flat revenue while the share price was up 3.36% in the past year excluding dividends, indicating excellent cost controls. The share count has decreased by 1% for the entire year. I don't like that both revenue was flat and earnings were up on a yearly basis. The results were mediocre to me, and investors seem to think they were good as the stock popped 0.92% after reporting while the S&P 500 increased in value by 0.14%. That being said, I think the stock is fairly valued. The results were helped by growth in the foods segment and not so much by the beverage segment. With the mediocre results, the stock is on my team but not in the starting lineup.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: I am long PEP, SPY. 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.

Source: PepsiCo's Earnings Indicate Great Cost Control But Not Much Else

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