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Pepsi Aims for Steady Growth in 2020

By Demitri Kalogeropoulos – Feb 19, 2020 at 10:30AM

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The soda and snack giant closed out 2019 on a positive note.

Investors were optimistic heading into PepsiCo's (PEP) fourth-quarter earnings report. While the company hadn't enjoyed the same demand rebound in sodas that rival Coca-Cola (KO) had in 2019, its wider portfolio still showed solid overall growth.

In its earnings report last week, Pepsi again trailed its larger beverage rival. But robust demand for Frito-Lay snack foods lifted sales and positioned shareholders for a return to annual profit growth in 2020.

Let's dive right in.

A glass of soda.

Image source: Getty Images.

Two different segments

Pepsi's organic sales growth landed at 4.3% to mark a slight deceleration from the prior quarter. Yet the boost was enough to push full-year gains to 4.5%, or modestly above management's original target for 2019.

The company continued to struggle in the beverage segment, which showed a 3% uptick for the quarter and for the broader year. Coca-Cola, in contrast, enjoyed a 6% spike in organic revenue last year. Those challenges were offset by solid gains in Pepsi's international markets like Europe and Latin America, plus robust demand for snack foods in general. Its Frito-Lay division expanded by 4.5% for the year. "We met or exceeded each of the financial goals we outlined at the beginning of the year," CEO Ramon Laguarta said.

An expensive year

Fiscal 2019 was an unusually expensive one as Pepsi poured resources into upgrading its supply chain and fixing manufacturing bottlenecks. The company also spent more heavily on marketing, including to support new product launches.

As a result, despite higher selling prices on most products, operating profit declined sharply in both the Quaker Foods and beverage divisions. Earnings per share declined 1% for the full year, consistent with management's original 2019 forecast.

On the bright side, operating cash flow improved to $9.6 billion from $9.4 billion and helped provide plenty of resources for stock repurchase spending and increased dividend payments. To that end, the dividend giant raised its annual payout by 7%, marking its 48th consecutive yearly increase.

Steady progress

Pepsi's 2020 outlook reflects a mostly stable, but strengthening, business. Organic growth should land at around 4% for the third straight year, executives predicted. Coke's outlook is similar, although the beverage specialist outperformed its 4% target last year by 2 full percentage points.

Pepsi predicted that earnings will return to growth in 2020, with per share profits rising 7% following last year's slight decline. That boost will make good on the promise that Pepsi issued back in early 2019 calling for a quick earnings rebound following an investment year.

Investors will be watching for signs of continued strength in the snack food segment in 2020, but Pepsi's global results won't likely impress without a real rebound in the beverage division. The company achieved modest price increases in 2019 and shored up its portfolio to target faster-growing niches like sparkling water. But so far investors haven't seen those changes result in stabilized market share for Pepsi's core beverage products, even as the food segment picks up most of that slack.

Demitrios Kalogeropoulos has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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