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PepsiCo Raised More Than Just Its Sales Outlook on Tuesday

By Demitri Kalogeropoulos – Oct 10, 2021 at 7:12AM

Key Points

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Demand isn't letting up in the second half of 2021.

PepsiCo (PEP -1.08%) shareholders have some more reasons to celebrate. The company recently announced third-quarter results that included surprisingly strong sales and earnings. Those gains came despite major challenges, including supply chain bottlenecks and spiking costs.

Not only did Pepsi navigate through those issues, but the beverage and snack food giant issued its second straight upgrade to its 2021 outlook.

Let's dive right in.

Two people drinking soda on a boat.

Image source: Getty Images.

Sales trends

PepsiCo's sales trends again beat expectations, with organic revenue rising 9%, or slightly faster than the rate the company had achieved through the first half of 2021. Sales through early September benefited from more modest declines in the Quaker Foods division compared to soaring results a year earlier .

Pepsi also notched much higher volumes across most of its international markets, while the U.S. snack food division got a lift from higher prices. "We are pleased with our results," CEO Ramon Laguarta said in a press release, "as we delivered very strong net revenue growth while carefully navigating a dynamic and volatile supply chain and cost environment."

Costs are up

Pepsi offset those cost issues through a mix of strong execution, price increases, and product innovation including new flavors in hit brands like Doritos. These wins allowed operating profit to rise 5% after adjusting for currency exchange rate shifts, which translates into only a modest margin drop and slightly lower earnings, year over year.

Cash flow was solid, with operating cash reaching $6.6 billion so far this year compared to $6.1 billion a year ago. Pepsi is directing much of that cash toward paying down the debt it took on at the beginning of the pandemic, with less spending happening on stock buybacks for now. But those repurchases should accelerate again soon thanks to robust demand and the brighter earnings outlook.

The new outlook

The best news in this report was Pepsi's second straight upgrade to its 2021 forecast. Organic sales are now expected to jump by 8% this year, or roughly double the pace the company had managed in each of the two previous years. Pepsi entered the year predicting roughly 5% gains before boosting that forecast to 6% in July.

The earnings outlook got another hike, too, with earnings on track to jump 11% overall. That forecast implies a weak fourth quarter ahead as Pepsi invests in its manufacturing and supply chains while holding the line on price increases. But shareholders are still looking at the potential for a third consecutive year of solid results in earnings, cash flow, and organic sales.

Given that track record, it's curious that the stock has underperformed the market in 2021. Pepsi is growing much more quickly than it has in years, and it is priming itself for expanding profit margins in 2022 and beyond. Sure, cash returns are down this year and the short-term earnings outlook is cloudy. But investors looking for a stable dividend payer with attractive growth prospects should be happy to own this consumer staples stock today.

Demitri 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.

Stocks Mentioned

PepsiCo Stock Quote
PepsiCo
PEP
$181.14 (-1.08%) $-1.98

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