PepsiCo Gets a Lift From a Familiar Source

Image source: PepsiCo's Instagram page.

If there's one recurring theme so far inPepsiCo's(NYSE: PEP)fiscal 2016 earnings, it's the importance of North American beverages and snacks in the company's earnings mix. Below, let's break down the numbers behind PepsiCo's fiscal third-quarter report, issued on September 29, and examine this trend, as well as other catalysts pushing the refreshment conglomerate forward in 2016.

PepsiCo: The raw numbers

Metric Q3 2016 Actual Q3 2015 Actual Year-Over-Year Growth (Decline)
Revenue $15.9 billion $16.3 billion (1.9%)
Net income $2.0 billion $0.53 billion N/A*
Diluted earnings per share $1.37 $0.36 N/A*

DATA SOURCE: PEPSICO 8-K FILING, September 29, 2016. *Net income and earnings per share are not comparable due to a $1.4 billion impairment charge taken by PepsiCo in Q3 2015, to deconsolidate operations in Venezuela."

What happened with PepsiCo this quarter?

  • Net revenue declined nearly 2% as the same factors that crimped top-line growth in the second quarter weighed on the third. PepsiCo cited foreign currency translation and lost sales from last year's deconsolidation of Venezuelan operations as primary revenue headwinds during the last three months.
  • Organic revenue, however, which excludes the items above, as well as the effects of other acquisitions and divestitures, expanded by 4.2% over the prior-year quarter.
  • The wide variance in net income and earnings per share seen in the table above resulted from a $1.4 billion write-off that Pepsi booked in Q3 2015 when it deconsolidated Venezuelan operations. This action has turned out to be a net positive, as investors no longer have to worry each quarter about the hyperinflation of Venezuela's currency and the effects of the deteriorating Venezuelan economy on PepsiCo's performance.
  • As has been the case for most of this year, the company's North American snacks and beverages businesses propped up total results. Frito-Lay North America (FLNA) and North American Beverages (NAB) each improved revenue by 3%. Together, these segments comprised 57% of company revenue for the quarter.
  • FLNA and NAB also increased segment operating profit by 6% and 5%, respectively. Their combined segment operating profit of $2.1 billion made up two-thirds of PepsiCo's quarterly operating income before the allocation of corporate overhead items.
  • Since FLNA and NAB both derive most of their revenue from the U.S., they're insulated from the currency fluctuations that have impacted PepsiCo's other global segments, as of late. All other geographical segments besides these two recorded either flat or declining revenue during the quarter due to the strength of the U.S. dollar.
  • However, PepsiCo is seeing organic sales growth in both mature and developing markets. The Latin America segment posted organic revenue growth of 10% during the quarter, and both Europe Sub-Saharan Africa (ESSA) and Asia Middle East and North Africa (AMENA) expanded organic revenue by 5%.
  • The company reaffirmed its net capital expenditure target of $3 billion for 2016, as well as its full year goal to return $7 billion to shareholders through dividends and share repurchases.

What management had to say

Recently, PepsiCo's management has emphasized its approach to sustainability and "guilt-free" products -- offerings that contain lower sodium and/or sugar, as well as reduced non-natural ingredients.Although in previous years, such initiatives may have existed more for marketing purposes than anything else, there's evidence that PepsiCo is starting to reap positive financial impacts from the strategy.

On the company's earnings conference call on September 29, CEO, Indra Nooyi quantified some of the economic benefit PepsiCo has realized:

Nooyi noted other examples of the company'shealthful products emphasis. Sabra, the natural foods label known for its hummus, has grown to $800 million in annual U.S. retail sales, and is projected to be a "billion dollar brand" in the near future. And recently, PepsiCo launched "Stubborn Soda," a craft soda which avoids high-fructose corn syrup in its formulation, instead relying on Stevia and Fair Trade-certified cane sugar as sweeteners.

Looking Forward

Innovations like Stubborn Soda, the evolution of "guilt-free" offerings, and sustainability initiatives that actually save the company money, demonstrate how PepsiCo's brand marketing strategy has evolved into a full-blown business strategy. Most comforting to shareholders is the evidence of a broad-based and cogent plan to offset weakness in PepsiCo's flagship soda lines such as Pepsi and Diet Pepsi.

As it did last quarter, the executive team raised full-year earnings-per-share guidance this week, from an adjusted 2016 EPS goal of $4.71 to a new target of $4.78.Management clearly believes that, with its strategic evolution, and despite greenback strength, PepsiCo is currently enjoying a period of earnings momentum.

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Asit Sharma has no position in any stocks mentioned. The Motley Fool owns shares of and recommends PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.