The Pepsi Advantage
A robust portfolio of noncarbonated beverages and snacks will allow the wide-moat firm to weather declining carbonated soft drink volumes more easily than its peers.
Wide-moat Pepsi (PEP) reported solid year-end results that were in line with our expectations, and we’re reiterating our $106 fair value estimate, excluding the benefit from the time value of money. Annual organic revenue increased 3.7% year over year, coming in slightly below the 4% growth we had anticipated, and operating margins expanded by 235 basis points to 15.6%. Both the beverage (approximately 47% of total sales) and snack (53%) segments experienced steady organic volume growth (up 2% and 3%, respectively) last year, and we continue to believe that Pepsi’s robust portfolio of noncarbonated beverages and snacks will allow the firm to weather declining carbonated soft drink volumes more easily than its peers. Moreover, we continue to believe that the firm’s productivity investments will allow margins to expand at a faster rate than revenue growth over the next several years, leading to our forecast of a five-year operating income CAGR above 5%.
Annual revenue was driven by the Frito-Lay North America (25% of total sales) and North American Beverages (34%) segments, with balanced contribution to organic revenue growth from volume and price/mix. These segments also were able to offset increased investments in advertising and marketing (by our estimates, above 6.5% of sales this year, versus 6% on average over the last five years) with productivity improvements and lower raw material costs, allowing for high-single-digit increases in core operating profit. Pepsi also continues to launch new, and often healthier, products in these segments to better align with changing consumer preferences. This has allowed net revenue from new products (those introduced within the last three years) to average over $5 billion (nearly 8% of 2016 revenue) since 2013, whereas we estimate that trademark Pepsi-Cola only contributes $7.5 billion (12%) of revenue.
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Sonia Vora does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
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