Investors found plenty to like about the latest earnings report from PepsiCo (PEP 3.62%). Sales growth is accelerating, market share is up, and a revamped cost-cutting program promises to push margins higher over the next few years.
In a conference call with investors, CEO Ramon Laguarta and his team explained why they believe they can keep winning market share from Coca-Cola (KO 1.50%) and from rivals in the snack and packaged foods niches in 2021 and beyond. Let's look at some highlights from that second-quarter presentation.
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1. It's all about snacks
Pepsi revealed several head-turning growth metrics, with organic sales soaring 15% in the U.S. beverage division and jumping 13% across the entire portfolio. Gains in the beverage division helped offset plunging demand in the Quaker Foods niche as the company lapped the initial pantry-stocking phase of the pandemic last year.
But the Frito-Lay snack food segment, which rose 6% on top of a big jump last year, was arguably more important. "The biggest highlight for me is the resilience of our snack business," Laguarta said. Hit brands like Lays and Doritos remained popular even through wild swings in consumer mobility over the last year.
And a flood of innovative launches lifted profit margins, with help from rising prices. Laguarta called that performance "extraordinary," given the competition in the category and all the changes in consumer preferences in the past year.
2. Getting more efficient
Pepsi changed its tune on costs. It had been warning of a period of increased spending to support the shift into a more growth-oriented business, but now the company is projecting higher margins this year and aiming for fundamentally stronger earnings after that.
That shift is partly due to strong demand for more premium product introductions lately in niches like salty snacks. Pepsi also boosted its restructuring plan and is aiming to cleave roughly $1 billion out of its annual cost burden.
Stepping back, management said investors can expect bottom-line profitability to expand by less than 0.5 percentage points each year, with sales gains amplifying those gains. "The combination of accelerating revenue growth and 20 to 30 basis points of margin improvement translates into nice [earnings-per-share growth]," CFO Hugh Johnston said.
3. Balancing cash priorities
Several big investment priorities are taking up most of Pepsi's excess cash right now. These include upgrades to the supply chain and the digital selling platform, along with rising input and freight costs. Pepsi has to pay down the debt it took on during the initial crisis phase of the pandemic last year, too.
These pressures help explain why the company is done repurchasing its stock for now, and why the dividend rose just 5% for 2021. That's also a key reason behind Wall Street's decision to leave Pepsi out of the recent stock market rally so far in 2021.
The stock's underperformance shouldn't last long given all the success Pepsi is having in market share and profitability. As a result, investors looking for a strong, stable dividend stock with good growth potential should consider adding PepsiCo, along with its current 3% annual yield, to their portfolio.
