PepsiCo Beats Expectations and Raises Guidance In Its Q2 Report
PepsiCo (PEP) was in the spotlight this week with the company posting its second quarter earnings. Coming into the earnings report, PEP shares had underperformed the S&P 500 by a fairly wide margin throughout 2021, posting low-single digit year-to-date gains compared to the broader market’s roughly 15% appreciation. However, in recent weeks, we’ve seen investor sentiment shift a bit, with regard to mature, defensive, consumer staples stocks like PepsiCo, in large part due to the falling yield on the U.S. 10-year treasury notes and investor demand for passive income in a yield starved market.
PepsiCo is well known for its dividend, having posted 49 years of consecutive dividend growth. And, while no equity dividend is ever completely safe and comparisons between dividend yields and bond yields are an apples to oranges comparison, in terms of safety, the fact is, a dividend increase streak that spans nearly 5 decades is going to provide a sense of solace for someone looking to put capital to work.
With bullish sentiment surrounding shares, the company had a lot at stake when it came to its quarterly report. Because of this, we wanted to take a look at the reports published this week by the credible authors that the Nobias algorithm tracks to see whether or not the recent rally that PEP shares have experienced is something that investors should consider buying into or avoid in today’s marketplace.
Richard Saintvilus, a Nobias 5-star rated analyst published an article on July 12th (the day before PepsiCo’s Q2 report) highlighting his expectations for the quarter. He noted Pepsi’s share price weakness as of late, mentioning the disappointing year-to-date performance as well as the fact that PEP shares had only risen “13% over the past year, compared to the 38% rise in the S&P 500”. However, Saintvilus points out that PepsiCo has “underperformed despite reporting not only rapid organic sales growth, but also strong free cash flow in 2020 amid the pandemic.”
In other words, while sentiment surrounding shares has been negative over the last year or so, the company’s fundamentals continue to improve. He chalks a lot of this up PEP’s diversified portfolio, which sets PepsiCo apart from its peers in the soda aisle (Saintvilus mentions that Coca-Cola (KO) and Keurig Dr. Pepper (KDP) are pure play beverage names whereas PepsiCo has exposure to snack foods as well via brand names like Quaker Foods, Rice-A-Roni, and Frito-Lay). He said, “Pepsi’s Frito-Lay brands snack business has taken off as shoppers stocked both their pantries and refrigerators. What’s more, as people work and learn from home, the company has benefited from increased at-home breakfast, snacking and dinner trends.” And, in the beverage space, Saintvilus highlight’s recent success that PepsiCo has had, noting that the company “has gained market share in several key categories. Not only has the company grown in share in total juices and juice drinks, Pepsi has also taken share in sparkling water categories, as well as ready-to-drink tea and coffee beverages.”
Coming into the Q2 print, Saintvilus said that Wall Street expects the company to generate earnings-per-share of $1.53 per share on revenue of $17.97 billion. And, on the 13th, PepsiCo management did not disappoint. When the actual earnings were posted, we saw GAAP earnings-per-share of $1.70 and non-GAAP earnings-per-share of $1.72. These two figures beat the analyst expectations by $0.18/share and $0.19/share, respectively.
The year-over-year earnings growth rate came in at 44% during Q2 and on the top-line, PEP’s performance was nearly as impressive, with revenues of $19.22 billion, which represented 20.5% year-over-year growth and beat analyst estimates by $1.27 billion. Mark Vickery, a Nobias 4-star rated analyst, published a report associated with PEP’s Q2 numbers on Yahoo Finance this week. In his note, Vickery put a spotlight on the top and bottom line beats, as well as saying, “Organic Revenue Growth of +7.4% was very strong, and guidance is for +6% organic revenue growth through the second half of 2021.” Really, this strong performance shouldn’t have come as a surprise to anyone. Vickery concluded his piece saying, “PepsiCo has not missed an earnings estimate since Q4… of 2009!”
Dan Caplinger, a Nobias 4-star rated analyst, published a post-earnings article at The Motley Fool this week, and in his piece, Caplinger highlighted some of the specific segment results saying, “Looking more closely at various PepsiCo segments, the various beverage units showed substantial gains in revenue and volume, led by a 34% rise in volume in PepsiCo's Africa, Middle East, and South Asia unit and a 21% rise in organic revenue at PepsiCo Beverages North America.”
Caplinger did note that “Snack foods performed less well, though, with Quaker Foods North America reporting a 14% decline in organic revenue as sales volumes dropped 21% year over year.” Some of this is being attributed to different shopping habits (a year ago during the pandemic, consumers were hoarding non-perishable goods like the snacks that PepsiCo sells) and overall, the guidance that management provided for the rest of the year was also impressive. Caplinger concluded his article saying, “PepsiCo sees growth continuing, and it now expects full-year earnings to rise 11% after having previously seen single-digit percentage growth as being likely. Many see PepsiCo as a stalwart stock, and it's certainly done a good job over the long run keeping its business strong.”
In a post-earnings CNBC Interview, Hugh Johnston, who serves as Vice Chairman and CFO at PepsiCo, was obviously pleased with the results saying, “We feel awfully good about the way the business is performing right now.” Johnson also highlighted Saintvilus’s point about market share gains, saying that PepsiCo is taking share from smaller beverage players, as well as “the biggest competitor down in Atlanta”, referring to rival Coca-Cola.
Nicholas Ward is a Senior Investment Analyst at Wide Moat Research. He has spent the last 8 years writing about the stock market at various publications, including Seeking Alpha, The Street, Forbes Real Estate Investor, Sure Dividend, The Dividend Kings, iREIT, Safe High Yield, and The Intelligent Dividend Investor.
In PepsiCo’s Q2 report, the company’s CEO, Ramon Laguarta also had positive things to say. After provided the bullish guidance that Caplinger touched upon above, Laguarta said, “Our results give us confidence that the investments behind our Faster, Stronger and Better framework are working - as we invest in our brands, supply chain and go-to market systems, manufacturing capacity, capabilities and culture, and our society by integrating purpose into everything we do. Moving forward, we remain focused on winning in the marketplace and building competitive advantages that will position us well as consumer habits and preferences evolve over time.”
Because of the strong results, PepsiCo shares were up more than 4.2% this week. This pushes their year-to-date gains up above 5%; however, this means that the stock still has come catching up to do with regard to its performance relative to the S&P 500’s. Yet, it seems that PEP still has upside ahead because when we look at the community of credible authors that the Nobias algorithm tracks, we see that 89% of writers are bullish.
This week alone we saw 4 and 5-star authors publish 12 reports on Pepsico shares. One of these reports was Neutral, 2 of them were bearish, and the other 9 were bullish. And, these 4 and 5-star rated analysts have an average price target of $161.50 on PEP shares, which implies upside potential of 3.6% compared to PEP’s current share price of $155.82.
Disclosure: Nicholas Ward is long KO and PEP. Nicholas Ward wrote this article for Nobias at their request with a view of giving investors a balanced perspective based on the writings of Nobias highly rated analysts and bloggers. Nobias has no business relationship with any company whose stock is mentioned in this article and does not have a position in this stock.
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