PepsiCo (PEP) is trading roughly flat today (pun intended) following its Q3 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 Q3 results, core EPS (non-GAAP) rose 6% YoY to $1.48 while revenue rose 1.3% YoY to $16.24 bln. EPS came in better than market expectations but revenue was a bit light. Organic revenue grew 1.7% YoY (excludes foreign exchange impact). In terms of FY17 core EPS guidance, PEP now expects it to come in around $5.23, up from prior guidance of $5.13.
PEP says its businesses performed well in Q3 in what continues to be a challenging environment. Each of its operating sectors delivered results in line with or ahead of internal expectations, with the exception of North America Beverages (NAB) where revenue declined following two consecutive years of very strong Q3 growth. Despite the challenges in its NAB business, PEP noted that it generated revenue growth overall as well as operating profit and EPS growth. Although PEP has moderated its full-year organic revenue growth outlook, the company says it's now on track to exceed the EPS target set at the beginning of the year.
In sum, PEP has been hurt by a shift in consumer preference away from carbonated soda and toward non-carbonated drinks. That appears to have impacted results for its North America Beverages (NAB) segment in Q3. However, the company has been trying to innovate more with non-carbonated beverages and has had some 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 terms of its recent stock action, PEP has been coming under some pressure since it hit $119 in mid-August. It traded as low as $106.19 early this morning, but has recovered to the $109 area. The weakness over the past six weeks or so may have been due to concerns about the Q3 report and the beverage business in particular. Also, there have been some sell side analyst downgrades in recent weeks. Hopefully, PEP can get back on the upswing. It does pay a nice dividend with a current annual yield just below 3%.