Friday, 9 October 2015

PepsiCo - earnings wrap: nice pricing, share up with events

PepsiCo is always an early reporter in the earnings cycle and this quarter was no different. Back in July I observed 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'

In terms of trends from the results what was immediately apparent was the inevitable impact of the US dollar strength on foreign currency translation...

...but despite this the company upped its constant currency EPS growth targets and confirmed their productivity and cash return targets (with the latter equivalent to an impressive 6%+ of market cap): 

At the core of this were some impressive underlying geographic performances (with operational leverage) in both the Frito Lay and beverages North American business plus the European operations.  Overall 7% organic revenue growth in Q3 producing 12% core constant currency operating profit growth year-on-year with +5% underlying pricing shows something is going right in their business.  

Both these statistics were better than the equivalent 2015 YTD statistics of 6% and 9% respectively.  The improvement in the Quaker Foods North American and European businesses were amongst the more important drivers to this.  Amongst the reasons cited were productivity growth, a positive product mix and lower commodity prices.  

Elsewhere I note that free cash flow was running at an annualised equivalent rate of over US$7bn or about 5% of market cap.  Note that the proposed return of capital is running around a couple of US$2bn above this...but given PepsiCo's net debt to ebitda multiple is only a little above one times this is today not a huge issue.  

Ignoring the FX impacts (which I perceive will even out over time) PepsiCo is inherently a US$10bn+ operating profitability business which puts the shares on around x16 EV/ebit currently.  For a branded consumer business with good pricing power and a good balance sheet this is about right.  

The shares rightly then continue to exhibit a bit of resistance at/around the US$100/share level.

Hard not to conclude again that: 

'below US$95 and especially below US$90 opportunities to augment a PepsiCo position are apparent'

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