Pepsi's Softer Beverage Volume No Cause for Concern
We think the wide-moat company will be able to leverage line extensions and product innovation in its portfolio of leading brands to revitalize sales over the next several years.
PepsiCo’s (PEP) third-quarter results largely tracked our outlook for the year, and we do not anticipate material changes to our $117 fair value estimate outside of adjustments for the time value of money, which should add a dollar to our valuation. Year to date, net revenue has grown 1.7%, matching our 1.7% forecast for the year, thanks to organic growth in the food and snack business (which contributes above half of sales) and a 3% contribution from price/mix, which helped offset mid-single-digit volume declines in the North American beverage segment (about a third of sales). Although results in the North American beverage segment fell short of our expectations of low-single-digit sales growth for the year, we think Pepsi will be able to prop up sales over the near term through further investments in its brand assets, which underpin our wide moat rating. While the shares are trading at a slight discount to our valuation, we’d suggest investors keep this name on their radar and wait for a more attractive entry point.
Although the company trimmed its outlook for organic growth this year to below 3% (its original expectation), our view of its long-term trajectory is unchanged. We think Pepsi will be able to leverage line extensions and product innovation in its portfolio of leading brands to revitalize sales over the next several years. We forecast five-year compound annual revenue growth above 3%, with price/mix contributing above two thirds of this growth. Operating margin for the quarter stood above 18%, indicating 80 basis points of expansion year over year, and we reiterate our outlook for operating margin averaging above 17% over the next several years (which implies mid-single-digit operating income growth) as further savings from the company's productivity efforts, which target $1 billion in annual savings through 2019, materialize.
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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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