Refreshing Profits at Pepsi, Shares Attractive
The wide-moat firm's efforts to drive innovation within its portfolio and better promote new offerings have gained traction with consumers.
PepsiCo (PEP) posted strong top-line results in the third quarter, with organic sales up nearly 5% (with a 3% contribution from price/mix) and volume expansion in each of the firm's six segments. From our vantage point, this performance indicates the brand equity of Pepsi's food and beverage offerings (a key determinant of our wide moat rating) remains healthy, and that the firm's efforts to drive innovation within its portfolio and better promote new offerings have gained traction with consumers. Most importantly, we were pleased to see organic beverage volumes grow 2.5% (marking the third quarter of sequential improvement), including a return to volume growth in the North America Beverages segment (one third of sales). While we expect to adjust our near-term outlook to incorporate management's revised outlook for full-year organic growth (expected to be around 3%, which is about 60 basis points above our outlook) and earnings per share (now $5.65, versus $5.70 prior, due to a roughly 1% foreign exchange headwind), we aren't expecting a material change to our $123 fair value estimate. Shares are trading around a 10% discount to our valuation, which we view as an attractive entry point for investors.
The North America Beverages segment posted 2.5% organic growth during the quarter, with volumes up 1% (admittedly, on a 6% decline in the year prior) and price/mix strengthening (up 2%, versus a roughly 1% increase over the last several quarters). We attribute this improvement to strengthened innovation and execution in both the firm's core brand portfolio (including trademark Pepsi, Gatorade, and Mountain Dew) as well as the success of more recently launched offerings, like Bubly and LIFEWTR. We expect 1% to 2% annual improvements in price/mix longer term as consumers shift to noncarbonated (2% industrywide compound volume growth over the last five years, versus a 1% decline for carbonated soft drinks) and more premium beverages.
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Sonia Vora does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.