Pepsi Gains Momentum, Improves Profitability in Q2
We’re increasingly viewing the stock as a quintessential buy-and-hold investment.
As the 2020 second quarter was most starkly affected by pandemic restrictions, there was little doubt that wide-moat PepsiCo’s (PEP) second-quarter 2021 results would be led by sizzling headline numbers. The firm reported upside to already-lofty investor expectations (top- and bottom-line beats relative to FactSet consensus), demonstrating laudable progress on a slew of strategic priorities. In our view, the most impressive feat was the profitability improvement for the North America beverage business (operating margin up 400 basis points), which has been clouded by both exogenous and self-inflicted wounds in recent years. Management raised organic top-line growth guidance to 6% (from 5%). This momentum combined with time value should raise our $146 fair value estimate to roughly $151; this reflects a partial offset as we incorporate Morningstar’s probability-weighted expectation for an increase in the U.S. statutory tax rate to 26%. While the improving fundamentals are reflected in the price, we’re increasingly viewing the stock as a quintessential buy-and-hold investment.
Revenue of $19.2 billion was up 20.5% year over year. While a nontrivial portion of this was due to currency and acquisitions, organic growth was exceedingly healthy at 12%. The dominant snack food business continued to execute impressively across important markets and Frito-Lay platforms, though Quaker--the clearest beneficiary of pandemic-induced home eating occasions--started to retreat in line with our expectations (down 13%). Beverage sales were up 21% organically, supported by a strong bounce-back in North America. Though the latter faced easy comps, particularly in the food-service channel (where beverages doubled during the quarter), we were heartened to see continued strength in convenience and gas, which is a good barometer of the firm’s progress against strategic categories like sports and energy drinks.
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Nicholas Johnson does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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