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.

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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.

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