Is PepsiCo Still the Best Beverage Buy?

Should you buy PepsiCo after its first-quarter earnings?

Jun 27, 2014 at 7:00AM

The soda market in the U.S. is in a downward spiral as consumers continue to quit sparkling beverages. However, despite these headwinds, beverage giant PepsiCo (NYSE:PEP) has given healthy returns to its investors in the past. The company's snack food business has enabled it to offset falling sales in the soda segment and to enjoy competitive edge over its rivals The Coca-Cola Company (NYSE:KO) and Dr Pepper Snapple Group (NYSE:DPS).

First-quarter earnings
In the first quarter, PepsiCo's per-share earnings came in at $0.81, which easily beat Zacks Consensus Estimate of $0.75. Revenue stood at $12.62 billion, which also beat estimates by 1.2%. Organic snacks volume increased 2% from last year, buoyed by 3% growth in Europe and 4% in the emerging markets. Volume for beverages remained flat because of a decline in carbonated soft drinks' (CSD) sales.

What's cooking at PepsiCo?
During the last three years, PepsiCo has invested heavily in research and development (R&D). Since 2011, the company's annual R&D investment has gone up by about 25%. As a result, last year was one of the best years for PepsiCo in terms of innovation; nine of the top 15 new food and beverage introductions in the U.S. retail channels actually belonged to PepsiCo. In the first quarter of this year, products launched during the past three years contributed to 8% of total revenue.

Investments made in the emerging and developing (D&E) markets are also reaping results for the company. During the recent quarter, D&E markets' organic revenue jumped by 9%. Brazil and Russia saw double-digit organic revenue growth while India delivered high-single digit growth.

PepsiCo's three-year productivity program, which started in 2011, is about to be completed; the program is expected to save a total of $3 billion. The company has now unveiled a new productivity improvement program that will kick off in 2015. The five-year program, which focuses on increased automation and optimizing manufacturing footprint & go-to-market systems, is expected to save the company $1 billion annually through 2019.

Since 2011, PepsiCo's net revenue per employee has climbed by 9%. Likewise, its EBIT per employee has also improved by 5%. Moreover, it has reduced its average cash conversion cycle from 36 days in 2011 to 24 days in 2013.

Going forward, PepsiCo expects the emerging markets to continue driving its growth. However, the company won't be able to generate sizable profits from Venezuela because of political unrest, high inflation, and supply chain disruptions. In Mexico, too, the company's revenue is expected to be trimmed down as a result of food taxes.

In 2014, PepsiCo expects constant currency EPS to be about $4.50, an increase of 7% from $4.37 in the last year. This is in line with the company's long-term goal of high single-digit earnings growth.

Industry peers
Coca-Cola's first-quarter earnings were in line with expectations as it posted per-share earnings of $0.44. Though the company's net revenue beat estimates, it dropped 4% year over year because of unfavorable currency rates and costs associated with structural changes. Global unit volume grew 2%, buoyed by an 8% jump in still beverage volume. During the quarter, the company returned over $713 million to investors through share repurchases and also declared a 9% increase in its quarterly dividends.

Dr Pepper Snapple reported better-than-expected results in its most recent quarter. Earnings for the company rose 40% year over year to $0.74 per share, coming in well ahead of Zacks Consensus Estimate of $0.59 a share. The company booked $1.40 billion in revenue, a figure that marked 1% growth from the prior-year quarter. Dr Pepper Snapple has reaffirmed its previously given outlook for 2014; it expects per-share earnings in the range of $3.38 to $3.46, while sales are expected to remain flat to up 1%.

Final thoughts
Pepsi's first-quarter results were admirable as earnings, along with revenue, beat expectations. In fact, this was the fourth straight quarter where the company topped its earnings estimates. In future, the company's organic snacks and still beverages will fuel its growth rather than carbonated drinks. Emerging markets, especially the Asian and Middle Eastern countries, will continue posting incremental growth rates. Investments made in R&D will ensure PepsiCo keeps enticing its customers with some great new products. Productivity improvements initiatives have already saved billions of dollars for the company and will continue to do so in the coming years.

PepsiCo has given a strong outlook for this year's earnings, which shows that it's on the right track. Considering all of this, PepsiCo appears to be one of the best beverage buys now.

Leaked: This coming device has every company salivating
The best investors consistently reap gigantic profits by recognizing true potential earlier and more accurately than anyone else. Let me cut right to the chase. There is a product in development that will revolutionize not just how we buy goods, but potentially how we interact with the companies we love on a daily basis. Analysts are already licking their chops at the sales potential. In order to outsmart Wall Street and realize multi-bagger returns, you will need The Motley Fool’s new free report on the dream-team responsible for this game-changing blockbuster. CLICK HERE NOW.

Zahid Waheed has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of PepsiCo and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

Money to your ears - A great FREE investing resource for you

The best way to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as “binge-worthy finance.”

Feb 1, 2016 at 5:03PM

Whether we're in the midst of earnings season or riding out the market's lulls, you want to know the best strategies for your money.

And you'll want to go beyond the hype of screaming TV personalities, fear-mongering ads, and "analysis" from people who might have your email address ... but no track record of success.

In short, you want a voice of reason you can count on.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich," rated The Motley Fool as the #1 place online to get smarter about investing.

And one of the easiest, most enjoyable, most valuable ways to get your regular dose of market and money insights is our suite of free podcasts ... what we like to think of as "binge-worthy finance."

Whether you make it part of your daily commute or you save up and listen to a handful of episodes for your 50-mile bike rides or long soaks in a bubble bath (or both!), the podcasts make sense of your money.

And unlike so many who want to make the subjects of personal finance and investing complicated and scary, our podcasts are clear, insightful, and (yes, it's true) fun.

Our free suite of podcasts

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. The show is also heard weekly on dozens of radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable. Rule Breaker Investing and Answers are timeless, so it's worth going back to and listening from the very start; the other three are focused more on today's events, so listen to the most recent first.

All are available for free at www.fool.com/podcasts.

If you're looking for a friendly voice ... with great advice on how to make the most of your money ... from a business with a lengthy track record of success ... in clear, compelling language ... I encourage you to give a listen to our free podcasts.

Head to www.fool.com/podcasts, give them a spin, and you can subscribe there (at iTunes, Stitcher, or our other partners) if you want to receive them regularly.

It's money to your ears.

 


Compare Brokers