A watched pot never boils. PepsiCo (PEP) is an investment that will continue to reward the patient and punish the impatient. PepsiCo shares have had a lackluster 2018 as the market has been overly negative on the business. Today, PepsiCo surprised with a sales and earnings beat. In the second quarter of 2018 organic revenue grew roughly 3% and EPS landed at $1.61 per share above the $1.52 estimate.
Leading the way was the Frito-Lay North America segment which grew 4% in sales and 5% in constant-currency profit. The Frito-Lay business is the most important business from a profitability perspective.
The North America Beverages segment continues to struggle from a YTD perspective as organic volumes are down 2% and operating profit is down 18% from prior year. Transportation costs, commodity pricing, and a bonus payout to employees are the main drivers of the cost increases. To counter-act this volume struggle PepsiCo plans on increasing spending on their advertising campaigns behind Gatorade, Pepsi, and Mountain Dew. This move also includes re-releasing Baja Blast and launching calorie-free Gatorade Zero. The zero sugar Pepsi brand is doing “exceeding well” according to CEO Indra Nooyi. Pepsi also re-affirmed their full year financial forecasts.
We are confident in PepsiCo’s plan to reach their full year forecast. PepsiCo has a long-term oriented CEO who is shifting the business in the right direction.
“The distance between number one and number two is always a constant. If you want to improve the organization, you have to improve yourself and the organization gets pulled up with you. That is a big lesson. I cannot just expect the organization to improve if I don’t improve myself and lift the organization, because that distance is a constant.” – Indra Nooyi CEO PepsiCo
PepsiCo continues to shift to the customer demands of healthy beverage and snack brands including Bubly, Pure LeafTea Collection, Quaker, Kevita, Bare snacks, Gatorade Zero, and Sakata veggie crackers.
If PepsiCo can improve beverage sales and find a way to better manage their logistics and operational performance they will have a great year. PEP also has an attractive yield of 3.4%.
data provided by Morningstar
PepsiCo has some struggles but overall meets our criteria for a Wide-Moat Profitable business that we expect to generate excess returns over the next decade.