Analyst Note| Nicholas Johnson, CFA |
As the 2020 second quarter was most starkly affected by pandemic restrictions, there was little doubt that wide-moat PepsiCo’s 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.