Pepsi still looks Good after Earnings
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The more I invest, the more I am convinced that alpha, in the current market environment, is to be found in large, blue-chip stocks. Even stronger is my conviction on blue-chips in the consumer staples sector, because no matter what happens to the world economy, people are still going to need toilet paper, food, and drinks.
PepsiCo (NYSE: PEP) makes a range of tasty beverages and snacks. It is the world’s second largest producer of carbonated drinks and the world’s largest producer of snack foods. In the last few years they’ve steadily increased earnings as well as their dividend, and they are currently priced attractively compared to peers. For those looking for stability in the American market, PepsiCo seems like a good choice.
Last Wednesday before the bell PepsiCo reported a second-quarter EPS of $1.12, beating the consensus by 3 cents, with revenue falling short of expectations by about $0.09 billion. Net profit is down 21% for the period. The valuations and ratios for the company are now as follows: The P/E stands at 19.05x compared to an industry average of 20.8x. Coca-Cola (NYSE: KO), Pepsi’s main competitor, has a P/E of 20.4x. PEP trades at a fairly steep 5.26 to book, but offers a return on equity of 30.5%. The stock has a low beta of .48 and is up just over 13% in the last 12 months. The firm maintains a respectable operating margin of 15.6%. A Dividend Aristocrat, PepsiCo has increased dividends for 40 years straight, now yielding just under 3.1%. Over the course of 2012, the firm intends to return some $6 billion to shareholders in the form of dividend and stock.
The earnings release was largely in line with company expectations, which sent the stock up over 1% before the bell. On the other hand, the expectations weren’t strung very high. The company reaffirmed its guidance for 2012, expecting core EPS to decline about 5%. Margins remain stable in the United States and Europe, but aren’t putting up staggering growth. Emerging markets growth on the other hand has been doing quite well, especially in Eastern Europe. Pepsi’s share of the Russian juice market is now up to 50%, surpassing Coca-Cola. PepsiCo posted a 5% organic revenue growth, which is pretty solid considering the state of the market at the moment. However, due to negative FX translation and structural changes, the net revenue dropped 2%. The firm is increasing the amount of money spent on marketing and media in North America especially, as well as innovation across the board. Generally, it has a well-diversified product portfolio in a wide range of channels. Of these products, their North American snack division is the most successful.
Pepsi faces a number of risks. Commodity cost inflation is a drain on the company, which it has been unable to fully recover with product price increases. Commodity cost inflation came in at about $350 million. Forex risk is another issue for the company, and has had a 3% impact on profits this report. The firm also faces intense competition in all of its core markets. Coca-Cola has a huge market share in North America, where Pepsi is looking at fairly lackluster growth. One could also question whether or not the company’s strategy of targeting this home market is ultimately profitable, as it is already highly saturated.
Although Q2 earnings were not stellar for PepsiCo, the company to my mind still provides good value for money. It has a diverse product portfolio that is gaining market share in emerging markets, particularly in Eastern Europe. The company is valued nicely at the moment but the outlook for the remainder of 2012 remains a bit hazy. Strong competition and rising commodity costs are pressuring the company’s profits while decreasing purchasing power in Europe may affect revenues in the near future.
DUJames has no positions in the stocks mentioned above. The Motley Fool owns shares of The Coca-Cola Company and PepsiCo. Motley Fool newsletter services recommend PepsiCo and The Coca-Cola Company. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. If you have questions about this post or the Fool’s blog network, click here for information.