Seeking Alpha
Research analyst, valuentum
Profile| Send Message|
( followers)  

Global snack and beverage maker PepsiCo (PEP) reported second quarter earnings Wednesday. The firm earned $1.12 per share, $0.03 more than expected by the Street, but still down 7% year-over-year. Revenue was in-line with consensus expectations, down 2% year-over-year to $16.5 billion. PepsiCo also reiterated its full-year guidance, expecting earnings per share to fall 5% year-over-year. PepsiCo has struggled mightily in North America lately, as it faces fierce competition in its beverage division from Coca-Cola (KO) and Monster Beverage (MNST), as well as negative effects at FritoLay from backlash against unhealthy snacks. Though the firm will be impacted by currency headwinds like most US companies with international exposure, it forecasts low-single digit revenue growth in constant currency terms. We continue to believe shares are fairly valued.

Net organic revenue at PepsiCo Americas Beverages grew only 2% in spite of pricing that was 3.5% higher. We suspect PepsiCo Americas Beverages will continue to struggle as it doesn't offer a very good product in the growing energy drink space, and we believe Powerade Zero is taking market share away from Gatorade. This segment is tremendously important to PepsiCo's overall sales and profit mix, but we think it could continue to lag the competition. Unlike Coca-Cola, which has acquired and expanded popular brands like Glaceu (Vitamin Water), Zico Coconut Water and Honest Tea, PepsiCo hasn't made many meaningful beverage acquisitions over the past few years. The firm is behind the curve in the beverage market and has yet to play catch-up.

On the other hand, PepsiCo Americas Foods saw revenue increase 4% during the second quarter to $5.7 billion and is now a larger business than beverages. Frito-Lay North America reported 3% revenue growth thanks to strength across distribution networks. Operating profit also grew 1% year-over-year. Quaker Foods North America revenue growth was flat year-over-year, though profit declined 8% due to higher commodity and input costs. Quaker is a relatively small portion of the Americas Foods business, but we suspect volumes and pricing will remain relatively unchanged going forward. Predictably, the growth driver of the Americas Foods business was Latin America Foods. This segment grew revenues 14% during the second quarter on a constant currency basis (8% reported) and operating profits 11% (-1% reported). The firm is taking advantage of growing wealth in the region.

Business in Europe held up relatively well for a region in economic turmoil. Organic net revenue grew 3% on a constant currency basis, driving constant currency operating profit growth of 15%. However, due to the strengthening dollar, reported revenue fell 5% to $3.6 billion, but operating profit still grew 11% during the quarter. Management specifically pointed to strength in Eastern Europe and Russia as growth drivers, so we suspect Western Europe could still be weak. Asia, Middle East and Africa (AMEA) also posted strong organic revenue growth of 10%, though reported revenue fell 8% year-over-year as it refranchised bottlers in China. We suspect the firm will continue to perform well in China thanks to its partnership with Yum! Brands (YUM) and growing consumer income levels in the region.

Overall, we thought the firm's second quarter was mediocre. We'd really like the firm to separate its food and beverages businesses, as we think it is executing well in foods but could use new management and innovation in its beverage business. Shares currently yield over 3% at current levels, but we do not think its dividend is particularly safe, nor do we think there is a good chance for dividend growth. We'd stay away from shares until the valuation becomes significantly more compelling.

Source: Pepsi's Second Quarter And Guidance Were Underwhelming