PepsiCo After Earnings: Buy, Hold, or Sell?

Source: PepsiCo.

PepsiCo (NYSE: PEP  ) reported better-than-expected results for the first quarter of 2014, and the company is outgrowing rival Coca-Cola (NYSE: KO  ) thanks to its strength in the snacks division and presence in healthy categories. Is PepsiCo a buy, hold, or sell after reporting earnings?

Sparkling performance
PepsiCo reported sales of $12.62 billion for the first quarter of 2014, versus an average estimate of $12.47 billion from Wall Street analysts. This was nearly flat in comparison to the first quarter of 2013, but results were negatively affected by factors such as operations refranchising in Vietnam and unfavorable currency movements.

Excluding these factors, organic revenue grew by 4% on the back of a 5% growth rate in the global snacks division and a 1% growth rate in organic global beverages sales.

Structural changes and currency fluctuations had a big impact on performance in emerging markets. PepsiCo reported a 2% decline in U.S. dollar sales in that segment; however, organic revenues in emerging markets grew by 9% when adjusting for these variables.

The company reported net pricing gains of 3% during the quarter, while total sales volume increased by 1% versus the same quarter in the prior year. In terms of volume, snacks sales grew by 2%, while beverages were flat versus the prior year.

Reported earnings per share increased by 15% to $0.79, better than the $0.75 per share forecast on average by Wall Street analysts. Core constant currency earnings per share increased by 10% versus the prior year, reflecting sound financial performance when adjusting for transitory factors.

Excluding the impact of structural changes and currency fluctuations, management is forecasting organic sales to increase in the mid single digits during 2014 and core constant currency earnings per share to grow by 7% versus 2013.

On Feb. 13 the company announced a 15% increase in dividends, marking the 42nd consecutive year of growing dividends for PepsiCo, and bringing the dividend yield to approximately 3.1% at current prices.

Management is planning to return nearly $8.7 billion to shareholders via dividends and buybacks in 2014, a big increase of 35% versus 2013, so capital distributions should be a considerable driver of investors' returns in the coming quarters.

Growth and valuation
PepsiCo trades at a P/E ratio of 19.6, fairly in line with historical averages for the company and with rival Coca-Cola, which trades at a P/E ratio of 21.3. Dividend yields are also quite similar: PepsiCo pays 3.1% and Coca-Cola carries a dividend yield of 3.2%.

There is one important difference, though: PepsiCo is doing better than Coca-Cola because of its strength in snacks, which provides diversification and additional opportunities for growth in a world in which soda consumption is under heavy pressure due to health considerations, especially in big markets such as the U.S.

Coca-Cola reported a decline of 1% in worldwide soda sales during the first quarter of 2014. The company compensated for this decline with growing volume of noncarbonated drinks, so total sales volume grew 2% during the period.

Still, Coca-Cola is underperforming PepsiCo when it comes to both sales and earnings growth. Reported revenues fell 4% during the first quarter of 2014, while sales excluding the impact of currency fluctuations and structural changes increased by 2% year over year.

Coca-Cola reported a decline of 6% in earnings per share during the quarter, even if comparable currency-neutral earnings per share did considerably better, with a 5% increase versus the first quarter of 2013.

Coca-Cola has enough brand power, marketing resources, and global scale to adapt to changing consumer habits with an increased presence in categories such as water, sports drinks, juice, and tea. This means that the company will most likely be able to reignite growth in spite of stagnant soda sales in the medium term.

Still, PepsiCo's presence in snacks and its portfolio of healthy brands, including worldwide leaders such as Tropicana, Quaker, and Gatorade, are proving to be valuable strategic assets for the company and its shareholders.

For a similar valuation to that of Coca-Cola, PepsiCo is offering higher growth rates, so the company is looking like a good alternative in terms of valuation versus financial performance.

Buy, hold or sell?
PepsiCo is a big player in a mature industry, so it's not easy for the company to generate growth. However, financial performance is quite solid, capital distributions are a big source of returns for shareholders, and the company is fairly valued against rival Coca-Cola. For investors looking for a sound and reliable performer, PepsiCo looks like strong candidate to consider.

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