Another solid quarter is under the belt.
On April 17, ahead of the opening bell, PepsiCo (PEP) delivered a convincing all-around beat on revenues of $12.88 billion that topped consensus estimates by $200 million. Meanwhile, adjusted EPS of $0.97 came in a nickel ahead of expectations. It was hard to find a single area of weakness in the numbers, even though currency factors pressured the top line by a sizable 3%.
The story starts with an encouraging mid-single digit sales growth in Frito Lay North America this quarter accounting for about 30% of total revenues (vs. 28% last year), supported by strength in both volume and pricing. The snack portfolio complemented the North America beverage segment well, which this quarter witnessed a modest drop in organic sales volume - likely a result of the known consumer preference shift towards non-sugary drinks.
Outside the home continent (31% of total revenues), all geographies witnessed organic growth of at least 8%, which is impressive for a market-leading company in this mature space. Each international segment produced strong double-digit growth in core operating income, also a noteworthy accomplishment. The underperformer was once again Quaker North America, a segment that is now so small (5% of total revenues) that it should impact any bullish investment thesis minimally, if at all.
Whereas in the past, I had been mildly disappointed by PepsiCo's high operating costs, often justified by marketing expenses needed to support product introductions and the integration of acquired businesses like SodaStream, this time I have no reason to complain. Adjusted opex rose only 2.3% YOY and accounted for 40.4% of total revenues vs. 40.5% last year. If not for a substantially higher effective tax rate, I estimate that EPS could have expanded YOY by at least a dime or roughly an extra ten percentage points.
See my simplified P&L below.
The Appeal of the Stock
PEP has been on quite a run lately. The stock currently trades at a rich current-year P/E of 22.9x that, for the first time in at least two years, has climbed to match Coca-Cola's (KO) earnings multiple. Once timid long-term EPS growth expectations of 5.5% are taken into account (see graph below), a PEG of 4.2x looks quite high for a mature company in the little-to-no growth packaged foods industry.
But I believe that figuring out whether PEP is undervalued or overvalued at current levels is not the best way to think about this stock. I have at least once urged readers to "look at PEP as a valuable diversification factor within a well-balanced portfolio". In addition to it and the S&P 500 (SPY) having shared a low correlation of only 0.59 since the beginning of 2008 (i.e. roughly the start of the Great Recession), PEP has recently proven to be a "sleep-well-at-night" stock. As the chart below depicts, shares endured the 4Q18 bear attack without dipping any further than 5% below its October 1st levels - while, as a bonus, rallying almost as strongly as broad equities did in 1Q19.
I do not necessarily have strong convictions that PEP will perform beyond expectations going forward - e.g. that future revenues or earnings will beat current consensus estimates. At least, recent results suggest that the company has been executing quite competently. But most importantly, I remain confident that PEP will continue to behave defensively, offering valuable portfolio protection against a potential deterioration in the macroeconomic landscape or in market sentiment.
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