PepsiCo (PEP) is trading roughly flat today following its Q2 earnings report this morning. In terms of background, of course, we are all familiar with Pepsi. But you may not realize that PEP does a lot more than that.
In addition to Pepsi, the #2 soft drink, the company also owns Mountain Dew, Mug and Sierra Mist. And it's not just 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.
Turning to the Q2 results, core EPS (non-GAAP) rose 10% YoY to $1.50 while revenue rose 2.0% YoY to $15.71 bln. Both results were better than market expectations, especially on the EPS line. Organic revenue grew 3.1% YoY (excludes foreign exchange impact). In terms of FY17 core EPS guidance, PEP now expects it to come in around $5.13, up slightly from prior guidance of $5.09.
In terms of factors affecting each of its divisions, Frito-Lay North America (FLNA) was positively impacted by productivity gains, partially offset by operating cost inflation and higher raw material costs. Quaker Foods North America (QFNA) was hurt by operating cost inflation and the impact of ceasing the operations of its Muller Quaker Dairy joint venture in the prior year. These impacts were partially offset by productivity gains and favorable settlements of promotional spending accruals compared to the prior year.
North America Beverages (NAB) was helped by productivity gains, higher operating results from joint ventures, insurance adjustments, a favorable legal settlement and favorable settlements of promotional spending accruals. Its Latin America segment was negatively impacted by operating cost inflation, higher advertising and marketing expenses, and higher raw material costs, partially offset by productivity gains.
Europe Sub-Saharan Africa (ESSA) saw productivity gains. Asia, Middle East and North Africa (AMENA)was negatively impacted by higher raw material costs (in local currency terms, driven by a strong U.S. dollar) and operating cost inflation, partially offset by productivity gains.
In sum, PEP has been hurt by a shift in consumer preference away from carbonated soda and toward non-carbonated drinks. However, the company has been trying to innovate more with non-carbonated beverages and has had some good success. Also, PEP has a lot of exposure in terms of non-carbonated sodas, including its Gatorade unit which continues to perform well. And its Tropicana orange juice brand is a major revenue driver.
In addition, its snack business has been doing quite well. In fact, 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, management has decided not to go that route. In the meantime, the stock just keeps steadily rising and it pays a nice dividend with a current annual yield of 2.8%.