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PepsiCo, Inc. Sees Muted Growth in 2016

By Asit Sharma - Feb 12, 2016 at 11:00AM

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The snack and beverage giant closed out 2015 with higher earnings. But in its fourth-quarter 2015 earnings release, management put forward a flat growth scenario for the rest of the current year.

Solid, if not very ambitious, targets for 2016. Image source: PepsiCo Q4 2015 investor presentation. 

In its final quarter of 2015, PepsiCo (PEP -1.41%) made the most of a challenging environment for U.S. based multinationals and weathered a currency-induced revenue decline to post higher net income. Below, we review salient points from the company's earnings report released Tuesday, and discuss management's outlook for the rest of the year.

PepsiCo: The raw numbers

 Q4 2015 ActualQ4 2014 ActualYear-Over-Year Growth (Decline)
Revenue $18.6 billion $19.9 billion (6.5)%
Net Income $1.72 billion $1.31 billion 31.3%
Diluted Earnings Per Share $1.17 $0.87 34.5%

Data source: PepsiCo 8-K filing, Feb. 11, 2016.

What happened with PepsiCo this quarter?

  • PepsiCo's 6.5% revenue decline was attributed primarily to eight percentage points of "foreign exchange impact on net revenue." 
  • The company achieved an operating margin of 12%, which represented a 10% improvement over the prior year quarter. 
  • Following last quarter's $1.4 billion charge to deconsolidate its Venezuela operations, Pepsi reported a negative impact of two percentage points on operating profit from the deconsolidation. This impact was expected, and the predictability of 2% in lost profits from Venezuela is likely much preferable to the uncertainty -- and shocks to quarterly earnings -- which shareholders previously weathered.
  • Management announced an increase in the annual dividend of roughly 7%, to $3.01 per share. As the company pointed out with well-deserved pride, this is the 44th consecutive year shareholders have received a raised dividend payout.
  • Like competitor Coca-Cola Company (KO -1.00%), PepsiCo is increasing advertising and marketing spends to sustain results. A yearlong increase of 40 basis points in advertising and marketing expense accelerated in the fourth quarter, to 85 basis points.
  • PepsiCo's North American businesses anchored overall performance during the quarter. Both the Frito-Lay North America (FLNA) and North American Beverages (NAB) segments increased organic revenue by 3% during the quarter, and expanded reported operating profit by 5% and 13%, respectively. These are PepsiCo's largest two segments, representing 72% of total company operating profit during the quarter. Their performance offset profit declines in nearly every other segment. 

What management had to say
PepsiCo's management has emphasized the difficult global economic environment when discussing results over the last few quarters. Q4 2015 provided no exception. CEO Indra Nooyi noted the following on Tuesday in the earnings release:

Our portfolio has been strategically designed to weather the current macroeconomic challenges. Our results reflect the balance of our brand portfolio, geographic footprint, consistent marketplace execution and a relentless focus on productivity. While facing the challenges of a choppy macro environment, we continued to make thoughtful investments in our future. By making investments in our brands, product innovation and supply chain, we have fortified our business for sustained growth. 
Our financial performance translated into strong cash generation, enabling us to continue to provide attractive cash returns to our shareholders. In 2015 we returned more than $9 billion to shareholders in the form of dividends and share repurchases, bringing our cumulative 10-year shareholder cash returns to more than $65 billion.
In brief, management believes revenue growth will be challenged in the near term, so it's focused on actions that will boost net income and consequently earnings per share. In the absence of brisk global consumer demand, and under the constraint of relative U.S. dollar strength, PepsiCo intends to tweak productivity and cost efficiency, while continuing to allocate its excess cash flow to shareholders. Again, this strategy is very similar to the one Coca-Cola is employing for the time being: bulk up the bottom line until an environment conducive to revenue expansion returns.
Looking forward
PepsiCo projected a full-year organic revenue gain of 4% on Tuesday, accompanied by currency impacts of negative 4%, which is essentially a prediction of flat reported revenue for the year.

However, management is also counting on productivity savings of $1 billion in 2016, which will help achieve the company's goal of improving "core," or adjusted earnings per share, by 8%, to $4.66. 

While these numbers aren't overly ambitious, PepsiCo may be setting itself up for some possible earnings surprises should the long dominant U.S. dollar weaken in 2016. At least in the first few weeks of 2016, such a scenario isn't out of the question: The AMEX Dollar Index, which tracks the greenback against a basket of major world currencies, has declined 3% so far year to date.

But if the year pans out in accordance with management's guidance, the company still offers shareholders incentives to remain invested. Of $10 billion in targeted 2016 operating cash flow, PepsiCo will incur capital expenditures of $3 billion. As the colorful graphic at the top of this article indicates, PepsiCo plans to return the difference -- its free cash flow -- to investors via the announced dividend increase and four more quarters of significant share repurchases.

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Pepsico, Inc. Stock Quote
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$164.01 (-1.41%) $-2.34
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