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.
|Morningstar Premium Members gain exclusive access to our full analyst reports, including fair value estimates, bull and bear breakdowns, and risk analyses. Not a Premium Member? Get this and other reports immediately when you try Morningstar Premium free for 14 days.|
Sonia Vora does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.
Transparency is how we protect the integrity of our work and keep empowering investors to achieve their goals and dreams. And we have unwavering standards for how we keep that integrity intact, from our research and data to our policies on content and your personal data.
We’d like to share more about how we work and what drives our day-to-day business.
We sell different types of products and services to both investment professionals and individual investors. These products and services are usually sold through license agreements or subscriptions. Our investment management business generates asset-based fees, which are calculated as a percentage of assets under management. We also sell both admissions and sponsorship packages for our investment conferences and advertising on our websites and newsletters.
How we use your information depends on the product and service that you use and your relationship with us. We may use it to:
To learn more about how we handle and protect your data, visit our privacy center.
Maintaining independence and editorial freedom is essential to our mission of empowering investor success. We provide a platform for our authors to report on investments fairly, accurately, and from the investor’s point of view. We also respect individual opinions––they represent the unvarnished thinking of our people and exacting analysis of our research processes. Our authors can publish views that we may or may not agree with, but they show their work, distinguish facts from opinions, and make sure their analysis is clear and in no way misleading or deceptive.
To further protect the integrity of our editorial content, we keep a strict separation between our sales teams and authors to remove any pressure or influence on our analyses and research.
Read our editorial policy to learn more about our process.