PEP with Nobias Technology: Case Study on Pepsi
The second quarter earnings season is just getting underway and with the June CPI data in hand, many investors are anxious to see what sort of impact the highest inflation that we’ve witnessed in 40 years will have on the fundamental results of stocks.
PepsiCo (PEP) reported earnings this week and shortly after the company’s results were made public, Nobias 5-star rated author, AJ Fabino, published an interview with Navellier & Associates founder and Chief Investment Officer Louis Navellier, which touched upon the current macro environment, and PEP’s results specifically, as a potential bellwether for the market as we forge further into the Q2 earnings season.
Aftering being asked, “How Do You Feel About Defensive [stocks] Coming Forward After Pepsi’s Report?” Navellier responded: “Clearly, the consumer is still spending. They want their chips and soft drinks. Pepsi’s international products are selling better than domestic products. It’s a good sign, we keep hearing that we’re in a recession — but, we keep creating jobs; we’re not in an earnings recession, earnings are still growing. Given that, year-over-year comparisons are becoming more difficult. So, Pepsi raising guidance today helped the entire market.”
PEP Jul 2022
Eric Schoeder, a Nobias 4-star rated author, published a report at Food Business News, which broke down the company’s results in great detail. Schoeder began his piece stating, “A pre-tax impairment charge related to the war in Ukraine dragged down second-quarter earnings at PepsiCo, Inc. but didn’t dampen the spirits of company executives who said business momentum continues.”
With regard to management’s upbeat tone, Schoeder quoted Ramon Laguarta, Pepsi’s chairman and chief executive officer, who highlighted the company’s growth during the recent earnings call. Laguarta said, “Our results are indicative of our highly dedicated employees, the strength and resilience of our categories, agile supply chain and go-to-market systems and strong marketplace execution. Our performance also gives us confidence that our investments to become an even Faster, even Stronger, and even Better organization by winning with pep+ are working. Given our year-to-date performance, we now expect our full-year organic revenue to increase 10% (previously 8%) and we continue to expect core constant currency earnings per share to increase 8%.”
On the top-line, PEP beat Wall Street’s expectations. During the quarter, Schoeder said that Pepsi’s net revenues “increased to $20.23 billion from $19.22 billion.” Wall Street analysts were expecting to see $19.51 billion, so PEP’s $20.23 mark not only represented 5.3% year-over-year growth, but also a $720 million beat.
With regard to PEP’s bottom-line, Schoeder wrote, “Net income in the second quarter ended June 11 totaled $1.43 billion, equal to $1.03 per share on the common stock, down 39% from $2.36 billion, or $1.70 per share, in the same period a year ago. The most recent quarter included a $1.4 billion pre-tax impairment charge related to the Russia-Ukraine conflict as well as a $13 million gain from the sale of the Tropicana, Naked and other select juice brands to PAI Partners.”
Schoeder broke down the food & beverage giant’s operational segment results, stating, “Operating profit at Frito-Lay North America (FLNA) totaled $1.45 billion, up 4.8% from $1.38 billion in the second quarter of fiscal 2021. Net revenue in the unit also increased, climbing nearly 14% to $5.18 billion from $4.55 billion.” He continued, noting, “Within the Quaker Foods North America (QFNA) unit operating income was $135 million, up 5.5% from $128 million in the same period a year ago. Net revenue was $675 million, up 17% from $575 million.”
Then, Schoeder said, “Operating profit in the PepsiCo Beverages North America (PBNA) unit totaled $651 million, down 20% from $809 million in the same period a year ago. Net revenue totaled $6.12 billion, down from $6.16 billion.”
Petar Mirkovic, a Nobias 4-star rated author, recently published an article at Seeking Alpha which also highlighted the strength of PEP’s recent quarter. He stated, “In the almost ever-increasingly difficult stock market situation we find ourselves in today, as market liquidity is being sucked out by high-interest rates, 40-year high record inflation numbers, and ongoing geopolitical crises caused by the Ukraine conflict, there are only a few companies that seem truly resilient to the ongoing crisis, and leading the way is none other than PepsiCo itself.”
Mirkovic continued, “The food and snack giant has solidified its position as a rock-solid inflation hedge and a top-class defensive stock in the eyes of many as it once again comes out swinging for its second quarter results showcasing its immense moat and pricing power that allowed it to push nearly all of the negative impacts down to the end customer.”
Mirkovic highlighted the top and bottom-line results, then stated, “More importantly, the company has shown strong resilience to the ongoing macroeconomic situation and once more solidified its position as an inflation hedge and a top-class defensive stock.” He went on to say, “A key metric in the staples space, organic sales have risen 13% in the quarter as well.”
Mirkovic clarified the importance of this data, stating, “An interesting way to look at the data is that "organic revenues" growth was set at 13%, while "organic volume" grew by only 1% this quarter, effectively meaning that demand stayed the same on aggregate, while prices were raised by roughly 12%. By itself, this can be viewed as a testament to the pricing power that PepsiCo commands.”
Mirkovic pointed out that PepsiCo’s ability to increase prices (via strong pricing power) shows the strength of its brands and the company’s ability to produce strong cash flows, even during volatile environments. He touched upon the ongoing issues that the company faces, especially in Europe, where circumstances outside of management’s control (the loss of sales in the Ukrainian and Russian markets due to the war) resulted in lower than expected volumes. But, Mirkovic said that this issue doesn’t point towards a global trend for Pepsi. He wrote, “Developing and emerging markets, on the other hand, remained resilient and managed to deliver double-digit organic revenue growth in the quarter.”
Regarding pricing power, Mirkovic concluded, “At the end of the day, the macroeconomic situation as bad as it is still hasn't gotten to a point at which it would chip away at the demand for PepsiCo's food and beverage family of products. Management felt that and was comfortable raising prices and pushing all the negative effects toward the end customer, which at least as far as the data tells us, has largely stayed loyal to the brands.”
Because of pricing power and the relatively strong cash flows that it allows PepsiCo to generate, Mirkovic noted that PEP has been able to be very generous to its shareholders with shareholder returns. He celebrated the company’s dividend, stating, “One of the strongest arguments for the food and beverage giant is its attractive dividend or more precisely, its commendable dividend growth story. PepsiCo is a company that has been successful in raising its dividend each year for the past 50 years, ultimately earning it the title of a "Dividend King" this year. This is an achievement so rare that only 31 companies held the status as of last year.”
In his conclusion, Mirkovic put a spotlight on the high quality metrics that PEP offers investors, writing, “As a result, PepsiCo was successful in solidifying its position as a great inflation hedge and a top-class defensive stock, which no doubt helped the company outperform the market for the first time in years, with the maker of Lays, Pepsi, and Mountain Dew generating a market alpha of 18.43% year-to-date and a 23.02% one-year alpha. In fact, with almost the entire rest of the market selling at significant discounts even as compared to pre-pandemic prices, the valuation situation has arguably gotten even more complicated.”However, after generating such strong alpha, Mirkovic could not offer a “Buy” rating on shares, due to relative valuation concerns.
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.
After its strong year-to-date performance, PEP shares trade with a 26.3x blended price-to-earnings ratio. This multiple is above the stock’s historical 5, 10, and 20-year price-to-earnings rate averages of 24.8x, 22.1x, and 21.1x, respectively.
With this outsized premium in mind, Mirkovic finished off his report stating, “With fully recognizing PepsiCo as a brilliant business that we would love to own, we simply cannot escape the conclusion that the current market premium assigned to the company is significantly limiting its prospect of being a great investment opportunity.”
Looking at the overall data collected by the Nobias algorithm when looking at the bullish/bearish bias expressed by the credible authors and Wall Street analysts that we track, we see an aggregate opinion that is somewhat in-line with Mirkovic’s. 90% of recent articles written by credible analysts focused on PEP shares have highlighted the company’s strong quality and expressed a “Bullish” bias.
However, when looking at the average price target currently being attached to the stock by the community of Wall Street analysts that Nobias tracks, we see limited upside potential from here. PEP currently trades for $170.98/share. Right now, the average price target that credible analysts have for PEP is $188.00. This implies upside potential of approximately 10% and results in a “neutral” overall sentiment from the credible analyst community.
Disclosure: Nicholas Ward is long 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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