Thursday, 9 July 2015

PepsiCo - impressive pricing

An impressive set of Q2 numbers from the beverages and snacks business PepsiCo...


...given they upped the core constant FX forecast (note the big FX hit - a theme I already noted with my WD-40 earnings numbers analysis here) but also they noted ongoing productivity savings and cash return to shareholders which is equivalent to 6% of market cap. As a combination of metrics these are not too shabby at all...

...so no surprises to see the shares up a little today.

Looking at the numbers I was really impressed by the (almost) across the board positive pricing.  Now admittedly this will still mean - due to the FX impact - negative sequential operating income movement.  Still impressive though - and there was even some emerging market volume growth too.

I noted that the company observed about the backdrop environment PepsiCo observed:

Other observations made struck a broader sensible tone - plus there was an extension review of innovation opportunities in the call.

'Returning cash to shareholders remain our top priority'

'Lean mean machine' re Latam bringing together of cost base

Frito Lay - seem to be preferring prices to volume

Exchange rates - Venezeula 2% of revenues and operating profit

Retail environment in the UK is 'interesting...entire retail situation re-set'.  Admitted lost some shorter-term market share

Innovation - 'get lots more price-mix...pricing innovation...is a real step-up'

Russia - 'doing well...business environment been good for us'


So pulling it all together my observations would be that I like the cash return to shareholders (c. 6% of market cap) note that a prospective EV/ebit multiple of x16 is fairly full and conclude that below US$95 and especially below US$90 opportunities to augment a PepsiCo position is apparent.  Interestingly this is what I concluded the last time I talked about the stock here

 'Below US$90 is a solid 'hold-buy' level for new money.  I would say that my pension fund to buy a position would have to see a slightly lower price than this.  Impressive numbers though?  Yes'


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