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PepsiCo (PEP) Up 27% in Six Months: Will the Momentum Last?

Zacks Equity Research

PepsiCo, Inc. PEP is benefiting from strength in snacking business and strong international presence. The company is focusing on driving greater efficiency and effectiveness, by lowering down costs and plowing back these savings to develop scale and core capabilities. All these helped PepsiCo to deliver solid first-quarter 2019 results.

Shares of this Purchase, NY-based company have increased 26.5% in the past six months, outperforming the industry’s rally of around 18%.


 

Let’s take a closer look at the aspects driving this Zacks Rank #2 (Buy) stock.

Snacking Category: Key Catalyst

PepsiCo has the competitive advantage of selling both snacks and beverages, which are complementary food categories. The complementary portfolio results in cost leverage, capability sharing, cross-category promotions and other commercial benefits. Notably, the company holds the number one position in the global snacks market with popular brands like Doritos, Cheetos and Lay’s. Just over half of PepsiCo's sales come from snacks, while the remainder is contributed by beverages.

The company’s growing snacks business has largely offset its sluggish beverages business in the past several quarters. The Frito-Lay North American snacks business has delivered consistent solid performance over the last four years. Gaining significant share in the snacking market, PepsiCo’s Frito-Lay North America business reported core constant-currency operating profit growth of 11% and organic revenue growth of 6% in the first quarter of 2019. This segment is likely to continue delivering strong sales and profits as demand for savory snacks is rising.

Strong International Presence

PepsiCo generates a significant part of its revenues outside the United States (38% of 2018 net revenues). The company is expanding in developing markets like Russia, Mexico, China, India, Brazil and Africa through tailored distribution models as well as by offering locally relevant innovation and value-added products. In Mexico and India, PepsiCo has a massive expansion plan in place over the next five years. In first-quarter 2019, organic revenues improved 10% at Latin America, 8% at ESSA and 10% at AMENA.

Cost Savings Program

PepsiCo is on track with its cost saving program and product improvement. The company estimates generating productivity savings of at least $1 billion annually through 2023. This marks an expansion from the prior target of $1 billion annual savings through 2019, under its five-year restructuring plan that was announced in February 2014. The company expects to achieve this productivity goal through savings generated from restructuring actions.

These actions are likely to position the company to further simplify, synchronize and automate processes; re-engineer the go-to-market and information systems; simplify the organization and optimize its manufacturing and supply chain footprint. As part of these restructuring actions, the company estimates incurring pre-tax charges of nearly $2.5 billion through 2023 (with cash portion of nearly $1.6 billion).

In the first quarter, the company’s organic revenues increased 5.2%. For 2019, the company estimates organic revenue growth of 4% compared with 3.7% growth in 2018. For the longer term, it projects organic revenue growth of 4-6%.

However, unfavorable impacts of ongoing investments to strengthen business, higher tax rate, and the absence of asset sale and refranchising gains that occurred in 2018 are likely to weigh on PepsiCo’s earnings in 2019. Further, adverse currency rates are likely to hurt the company’s sales and earnings in 2019.

Nevertheless, we expect all aforementioned growth drivers to offset these minor hurdles and help the company to sustain its solid momentum.

Other Key Picks

The Boston Beer Company, Inc. SAM has a long-term earnings growth rate of 10% and a Zacks Rank #1 (Strong Buy). You can see the complete list of today’s Zacks #1 Rank stocks here.

Monster Beverage Corporation MNST has a long-term earnings growth rate of 14.3% and carries a Zacks Rank #2.

Davide Campari-Milano S.p.A. DVDCY has a long-term earnings growth rate of 7.5% and a Zacks Rank #2.

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