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PepsiCo (NASDAQ:PEP) Misses Q4 Revenue Estimates


Full Report / February 09, 2024

Food and beverage company PepsiCo (NASDAQ:PEP) missed analysts' expectations in Q4 FY2023, with revenue flat year on year at $27.85 billion. It made a GAAP profit of $0.94 per share, down from its profit of $1.67 per share in the same quarter last year.

PepsiCo (PEP) Q4 FY2023 Highlights:

  • Revenue: $27.85 billion vs analyst estimates of $28.37 billion (1.8% miss)
  • EPS: $0.94 vs analyst expectations of $1.73 (45.5% miss)
  • Guidance for 2024 organic revenue of at least 4% year on year growth vs analyst estimates of up 4.9% year on year
  • Guidance for 2024 EPS of at least $8.15 vs analyst estimates of $8.15, meaning guidance is better than expectations since it states a minimum level in line with expectations
  • Free Cash Flow of $2.83 billion, down 38.3% from the previous quarter
  • Gross Margin (GAAP): 53%, up from 52.3% in the same quarter last year
  • Organic Revenue was up 4.5% year on year (miss vs. expectations of up 5.0% year on year)
  • Sales Volumes were down 4% year on year
  • Market Capitalization: $241.9 billion

With a history that goes back more than a century, PepsiCo (NASDAQ:PEP) is a household name in food and beverages today and best known for its flagship soda.

The company traces its roots to 1893 when a pharmacist from North Carolina named Caleb Bradham concocted a carbonated beverage, initially calling it "Brad's Drink." The soda was later renamed "Pepsi-Cola" because it contained pepsin (a digestive enzyme) and kola nuts. The next major milestone occurred in 1965, when Pepsi-Cola merged with Frito-Lay to create a combined company boasting both drinks and snacks.

Today, PepsiCo offers a diverse range of snacks and beverages through brands such as Lay's, Doritos, Cheetos, Gatorade, Mountain Dew, Tropicana, and Quaker Oats, to name a few. The core customer is therefore extremely broad–everyone from families to athletes to kids and adults alike. The company's products are widely available in grocery stores, supermarkets, convenience stores, restaurants, vending machines, and movie theaters globally. PepsiCo's strong distribution network is a differentiator and ensures that products are both easily accessible and visible in terms of shelf placement.

Pepsi will always be compared to and mentioned in the same breath as competitor Coca-Cola, but the company is iconic and unique in its own right due to its history and powerhouse portfolio of brands.

Beverages and Alcohol

The beverages and alcohol category encompasses companies engaged in the production, distribution, and sale of refreshments like beer, wine, and spirits, along with soft drinks, juices, and bottled water. These companies' performance is influenced by brand strength, marketing strategies, and shifts in consumer preferences. Changing consumption patterns are particularly relevant and can be seen in the explosion of alcoholic craft beer drinks or the steady decline of non-alcoholic sugary sodas. The industry is highly competitive, with a diverse range of products from large multinational corporations, niche brands, and startups vying for market share. It's also subject to varying degrees of government regulation and taxation, especially for alcoholic beverages.

Competitors that offer beverages and snacks include Coca-Cola (NYSE:KO), Keurig Dr. Pepper (NASDAQ:KDP), Nestle (SWX:NESN), and Mondelez (NASDAQ:MDLZ).

Sales Growth

PepsiCo is one of the most widely recognized consumer staples companies in the world. Its influence over consumers gives it extremely high negotiating leverage with distributors, enabling it to pick and choose where it sells its products (a luxury many don't have).

As you can see below, the company's annualized revenue growth rate of 9.1% over the last three years was decent despite consumers buying less of its products. We'll explore what this means in the "Volume Growth" section.

PepsiCo Total Revenue

This quarter, PepsiCo missed Wall Street's estimates and reported a rather uninspiring 0.5% year-on-year revenue decline, generating $27.85 billion in revenue. Looking ahead, Wall Street expects sales to grow 5.1% over the next 12 months, an acceleration from this quarter.

Gross Margin & Pricing Power

All else equal, we prefer higher gross margins. They usually indicate that a company sells more differentiated products and commands stronger pricing power.

This quarter, PepsiCo's gross profit margin was 53%, in line with the same quarter last year. That means for every $1 in revenue, $0.47 went towards paying for raw materials, production of goods, and distribution expenses.

PepsiCo Gross Margin (GAAP)

PepsiCo has best-in-class unit economics for a consumer staples company, enabling it to invest in areas such as marketing and talent to stay one step ahead of the competition. As you can see above, it's averaged an exceptional 53.9% gross margin over the last two years. Its margin has also been trending up over the last 12 months, averaging 1.6% year-on-year increases each quarter. If this trend continues, it could suggest a less competitive environment where the company has better pricing power and more favorable input costs (such as raw materials).

Operating Margin

Operating margin is an important measure of profitability accounting for key expenses such as marketing and advertising, IT systems, wages, and other administrative costs.

In Q4, PepsiCo generated an operating profit margin of 6%, up 3.1 percentage points year on year. This increase was encouraging, and we can infer PepsiCo was more efficient with its expenses because its operating margin expanded more than its gross margin.

PepsiCo Operating Margin (GAAP)

Zooming out, PepsiCo has managed its expenses well over the last two years. It's demonstrated solid profitability for a consumer staples business, producing an average operating margin of 14.4%. On top of that, its margin has remained more or less the same, highlighting the consistency of its business.

EPS

These days, some companies issue new shares like there's no tomorrow. That's why we like to track earnings per share (EPS) because it accounts for shareholder dilution and share buybacks.

In Q4, PepsiCo reported EPS at $0.94, down from $1.67 in the same quarter a year ago. This print unfortunately missed Wall Street's estimates, but we care more about long-term EPS growth rather than short-term movements.

PepsiCo EPS (GAAP)

Between FY2020 and FY2023, PepsiCo's EPS grew 28.3%, translating into a decent 8.7% compounded annual growth rate.

Wall Street expects the company to continue growing earnings over the next 12 months, with analysts projecting an average 23.6% year-on-year increase in EPS.

Cash Is King

If you've followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can't use accounting profits to pay the bills.

PepsiCo's free cash flow came in at $2.83 billion in Q4, up 52.7% year on year. This result represents a 10.2% margin.

PepsiCo Free Cash Flow Margin

Over the last two years, PepsiCo has shown decent cash profitability, giving it some reinvestment opportunities. The company's free cash flow margin has averaged 6.7%, slightly better than the broader consumer staples sector. Furthermore, its margin has averaged year-on-year increases of 2.2 percentage points over the last 12 months. This likely pleases the company's investors.

Return on Invested Capital (ROIC)

EPS and free cash flow tell us whether a company was profitable while growing revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit a company makes compared to how much money the business raised (debt and equity).

PepsiCo's five-year average ROIC was 19.8%, higher than most consumer staples companies. Just as you’d like your investment dollars to generate returns, PepsiCo's invested capital has produced solid profits.

The trend in its ROIC, however, is often what surprises the market and drives the stock price. PepsiCo's ROIC has stayed the same over the last two years. A rising ROIC would be ideal, but this is still a noteworthy feat when considering its returns are already high.

Key Takeaways from PepsiCo's Q4 Results

It was encouraging to see PepsiCo slightly top analysts' full-year earnings guidance expectations. That stood out as a positive in these results. On the other hand, its organic revenue unfortunately missed analysts' expectations and its operating margin missed Wall Street's estimates. Guidance for full year organic revenue called for growth of at least 4% while analysts' estimates call for 4.9% growth. Full year EPS will be "at least" $8.15, and with Consensus at $8.15, this portion of guidance can be viewed as better. Overall, the results were mixed. The company is down 1.2% on the results and currently trades at $171.9 per share.

Is Now The Time?

PepsiCo may have had a tough quarter, but investors should also consider its valuation and business qualities when assessing the investment opportunity.

We think PepsiCo is a good business. First off, its revenue growth has been decent over the last three years. And while its shrinking sales volumes suggest it'll need to change its strategy to succeed, its scale gives it immense negotiating leverage with retailers. On top of that, its impressive gross margins are a wonderful starting point for the overall profitability of the business.

PepsiCo's price-to-earnings ratio based on the next 12 months is 21.4x. There are definitely a lot of things to like about PepsiCo, and looking at the consumer staples landscape right now, it seems to be trading at a pretty interesting price.

Wall Street analysts covering the company had a one-year price target of $187.26 per share right before these results (compared to the current share price of $171.90), implying they saw upside in buying PepsiCo in the short term.

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