PepsiCo, Inc. PEP reported solid third-quarter 2019 results, wherein earnings and sales surpassed estimates. With this, the company reported sales beat in nine of the last 11 quarters. Further, it recorded positive earnings surprise in 14 of the last 15 quarters. However, the company’s core earnings per share declined year over year, owing to increased SG&A expenses, which also hurt operating margin.
PepsiCo’s shares rallied 3.3% in the pre-market session on Oct 3, after it reported strong third-quarter results. Moreover, shares of this Zacks Rank #3 (Hold) company have gained 21.2% year to date, outperforming the industry’s 13.5% growth.
Quarter in Detail
PepsiCo’s third-quarter core earnings per share (EPS) of $1.56 beat the Zacks Consensus Estimate of $1.50. However, core EPS declined 1.9% year over year. In constant currency, core earnings were down 1% from the year-ago period.
The company’s reported earnings of $1.49 per share declined nearly 15% year over year. Foreign exchange translation unfavorably impacted reported EPS by 1 percentage points.
Pepsico, Inc. Price, Consensus and EPS Surprise
Pepsico, Inc. price-consensus-eps-surprise-chart | Pepsico, Inc. Quote
Net revenues of $17,188 million advanced 4.3% year over year and surpassed the Zacks Consensus Estimate of $16,964 million. Notably, revenues included the negative impact of 1 percentage point from foreign exchange (Fx). On an organic basis, excluding currency headwinds, revenues rose 4.3%.
Revenue growth, on a reported and organic basis, was primarily driven by strength in all of the company’s businesses as well as robust pricing while volume remained flat. Notably, all segments witnessed organic and reported revenue growth in the third quarter. This was driven by strong progress on its strategic priorities and investments made in its capabilities, brands, manufacturing and go-to-market capacity to boost growth.
Total volume remained flat in the reported quarter. While organic snacks/food volume increased 1% (versus 2% growth witnessed in the second quarter), beverage volume improved 2% (after remaining flat in the last reported quarter). Meanwhile, net pricing improved 4% in the third quarter, driven by strong pricing across all segments.
On a consolidated basis, reported gross margin expanded 90 basis points (bps) while core gross margin improved 85 bps. Reported operating margin contracted 64 bps while core operating margin declined 42 bps. The decline in operating margin was mainly owing to higher SG&A expenses.
Reported revenues improved 6% at ESSA, 5.5% at FLNA, 5% at AMENA, 3.5% at PBNA, 2% in Latin America and 1.5% at QFNA segments. Meanwhile, organic revenues increased 9% at AMENA, 5.5% at FLNA, 4% each at ESSA and Latin America segments, 3% at PBNA and 1% at QFNA.
Operating profit (on a reported basis) declined 12% for the QFNA segment along with declines of 9% at PBNA and 3% at Latin America. However, it grew 15% for AMENA, 8% for ESSA and 4% for FLNA segments.
The company ended third-quarter 2019 with cash and cash equivalents of $5,494 million, long-term debt of $29,630 million, and shareholders’ equity (excluding non-controlling interest) of $14,129 million.
Net cash from operating activities was $5,063 million as of Sep 7, 2019, compared with $4,732 million as of Sep 8, 2018.
Driven by the robust revenue growth witnessed in the third quarter, PepsiCo now expects organic revenue for 2019 to meet or exceed 4% growth stated previously. Further, it reiterated other earlier assumptions for 2019. It plans to continue investing in capabilities that will position it for growth.
For 2019, the company continues to anticipate a nearly 1% decline in core constant-currency EPS. The decline in EPS is likely to be led by impacts of incremental investments to strengthen its business in 2019, higher core effective tax rate guidance, and lapping of a number of asset-sale and refranchising gains that occurred in 2018. Core effective tax rate is estimated to be nearly 21% in 2019.
Moreover, the company estimates foreign currency to impact revenues and EPS by nearly 2 percentage points in 2019, based on current rates. Due to the above-mentioned factors, it anticipates core earnings of $5.50 per share in 2019, suggesting a 3% decline from $5.66 reported in 2018.
Further, management plans to return $8 billion to shareholders through dividend payments worth $5 billion and share repurchases worth $3 billion. Free cash flow is estimated to be around $5 billion. Operating cash flow is expected to be nearly $9 billion, with net capital spending of $4.5 billion.
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Fomento Economico Mexicano S.A.B. de C.V. FMX, with a long-term earnings growth rate of 15.8%, presently carries a Zacks Rank #2.
Carlsberg AS CABGY, also a Zacks Rank #2 stock, has a long-term earnings growth rate of 5%.
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