PepsiCo (PEP 109.58, -1.13, -1.02%) is trading modestly lower today following its Q3
earnings report this morning.
In addition to Pepsi soda, the company also owns Mountain Dew, Mug, and Sierra Mist. Beyond soda, PEP also owns Tropicana orange juice, Gatorade sports drink, Naked juice, Lipton tea, and Aquafina water. PEP also owns Frito-Lay, the world's largest snack maker with offerings such as Lay's, Tostitos, Doritos, Ruffles, and Cheetos. Its Quaker Foods unit sells breakfast cereals (Cap N Crunch, Life, Quaker oatmeal), Aunt Jemima mixes and syrups, Rice-A-Roni side dishes etc.
Pepsi announced a pretty big acquisition in August 2018 when it said it will acquire SodaStream (SODA), the world's largest manufacturer of home beverage carbonation systems. After initially focusing on carbonated sodas, SODA made a big change a few years ago: it repositioned itself as a sparkling water brand. Its re-named Sparkling Water Makers enable consumers to easily transform ordinary tap water into sparkling (carbonated) water and flavored sparkling water in seconds.
Why would PEP buy SodaStream? The main reason is that carbonated soda sales have been slumping during the past few years. Sparkling water doesn’t contain as many calories, artificial flavors/colors, and caffeine so it is quickly becoming popular with consumers as an alternative to carbonated sodas. Sparkling water brands like LaCroix and Polar Water are big hits with consumers recently. This deal also gives PEP a beachhead for at-home water prep systems. It also boosts their "eco-friendly" reputation, which has been a goal for them.
Another benefit is that revenue comes not just from water maker sales. A recurring revenue stream exists since consumers need to purchase consumable gas refills and flavor packets.
Tomorrow (Oct 3), Ramon Laguarta, the former global operations chief, will become the new CEO after Indra Nooyi stepped down.
Turning to the Q3 results, core EPS (non-GAAP) rose 7% year/year to $1.59 while revenue rose 1.5% year/year to $16.48 bln. Both results were modestly better than market expectations, more so on the EPS line. Organic revenue grew 4.9% year/year (excludes foreign exchange impact). In terms of FY18 core EPS guidance, PEP lowered EPS guidance to $5.65 from prior guidance of $5.70. This lowered guidance seems mostly related to FX headwinds.
Overall, PEP says it was pleased with its Q3 results. It “continued to see very strong operating performance from its international divisions, propelled by developing and emerging markets.” Frito-Lay North America generated solid net revenue and operating profit growth; and North America Beverages delivered another quarter of sequential improvement in top-line performance.
Looking ahead, investors are anxiously looking forward to seeing how the new CEO will run the company. Some are hoping he will push to split the company in two. Investors have been asking for years that PEP separate its beverage business from its snack business in order to create two separate companies that could be valued by the market independently. However, the prior CEO decided not to go that route.
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