On May 19, we issued an updated research report on PepsiCo Inc. (PEP), one of the leading global food and beverage companies.
PepsiCo’s shares gained around 13.9% in the last one year, outperforming the 6.7% growth of the Zacks Consumer Staples sector. However, the company’s shares have performed almost in line with the Zacks categorized Beverages-Soft Drinks industry’s gain of 8.8% year to date.
Shifting consumer preference toward healthier food categories, rising volatility in global markets and increasing currency headwinds may dampen growth. That said, PepsiCo stepped up cost-saving initiatives along with increased marketing investments and package and product innovations are expected to boost its profitability.
First-Quarter 2017 Highlights
PepsiCo reported better-than-expected results in first-quarter 2017, with both earnings and revenues beating the Zacks Consensus Estimate. The company’s top line increased 1.6%, while the bottom line grew 5.6% on lower tax rate and higher interest income.
Due to challenging food and beverage industry trading conditions in North America and continued volatility in a number of developing and emerging markets, PepsiCo’s organic revenue grew by a modest 2.1%, mainly driven by higher pricing. However, organic sales growth was lower than the 3.7% rise recorded in the previous quarter.
In the developing and emerging markets, despite volatility, the company witnessed mid-single-digit organic revenue gains in the quarter. The company’s two largest developing and emerging markets, Mexico and Russia, saw growth across snacks, beverages and dairy. This led to high single-digit organic revenue growth in each of these important markets.
However, the company’s total operating performance seems to be lackluster. Core gross margins contracted 45 basis points (bps) year over year. Core operating margin contracted 28 bps on lower gross margin gains. Again, core constant currency operating profit increased only 1%.
