PepsiCo Inc. (PEP - Analyst Report) reported impressive fourth quarter results beating the Zacks Consensus Estimate for both revenue and earnings. Moreover, the company provided an impressive outlook for 2013 which was in line with long term targets and also increased its dividend rate.
PepsiCo’s fourth quarter 2012 earnings per share of $1.09 beat the Zacks Consensus Estimate of $1.05 by 3.8%. We believe that the earnings beat could be driven by negligible currency headwinds and lower taxes in the quarter. Earnings declined 5% from the year-ago levels due to year-over-year shortfall in revenues.
This popular snack and beverage company has beaten estimates for the past 4 straight quarters delivering an average earnings surprise of 2.74%.
Top-Line and Margin Details
Total sales in the quarter declined 1% year over year to $19.95 billion mainly due to an extra week in the prior-year quarter and some structural changes. Revenues, however, beat the Zacks Consensus Estimate of $19.67 billion.
The beverage re-franchising transactions in Mexico and China pulled down revenues by 3%, higher than managements’ expectation of 2.5%. Further, an extra reporting week in the prior-year quarter hurt revenues by 3%.
Foreign exchange hurt revenue growth by less than 1%, in line with managements’ expectations. Excluding these factors, revenues increased 5% on an organic basis driven by balanced growth in volume and price. On a constant currency basis, revenues were flat.
Impressive performance of the Americas Foods business, especially the Latin America segment also boosted sales growth in the quarter. The American foods business gained from successful innovations and increased brand building investments.
Core constant currency operating profit declined 7% in the quarter mainly due to increased ingredient costs and higher advertising, marketing and pension expenses. Stronger prior year comparisons which included one time gains from divestitures and asset disposals also hurt operating profit growth.
PepsiCo Americas Foods (PAF): The segment, which makes popular foods like Lay’s potato chips, Cheetos cheese flavored snacks and Quaker-brand cereals and snacks,recorded revenue growth of 3.5% (organically up 8%) to $7.63 billion. Price/mix gains, volume growth, innovation and higher marketing spend boosted revenues of the segment. The segment’s core operating profit declined 2% in constant currency million due to high commodity and advertising/marketing costs.
Frito-Lay North America (FLNA): Revenues declined 1% year over year to $4.1 billion due to the extra reporting week in the prior-year quarter. However, on an organic basis revenue grew 5% fueled largely by volume growth and improved market share trends. Core operating profit was up 3% as organic top-line growth and productivity benefits were partially offset the commodity cost headwinds and increased marketing expenses.
Latin AmericaFoods (LAF): Revenues increased 13% year over year (both reported and organic) to $2.7 billion driven largely by price/mix gains and also organic volume growth. Despite revenue growth, core operating profit declined 4.5% in constant currency terms due to commodity cost increases and higher marketing spend.
Quaker Foods North America (QFNA): Revenues declined 0.5% to $815 million due to the extra reporting week. Organically revenues increased 5% driven largely by volume gains. Core operating profit declined 18% in constant currency due to high commodity and marketing costs and strong prior-year comparisons.
PepsiCo Americas Beverages (PAB): Net revenue of this segment, which makes popular beverages like Pepsi, Mountain Dew, Diet Pepsi, and 7UP,slipped 4% year over year to $6.07 billion mainly due to the extra reporting week and re-franchising of the Mexican beverage business. Organically revenues improved 2.5% driven largely by price/mix gains and improved market share trends due to increased brand investments. Non-carbonated beverages volume improved while carbonated soft drinks volume declined in the quarter.
Core operating profit declined 8% in constant currency in the quarter due to high commodity costs and increased marketing/advertising spend.
Europe: Net revenue in the segment improved 1% year over year (up 3% organically) to $4.29 billion mainly due to price/mix gains and volume growth in Russia and parts of Eastern Europe. Core operating profit declined 10% year over year in constant currency due to higher commodity and marketing costs.
Asia, Middle East & Africa (AMEA): Net revenue declined 13% to $1.96 billion mainly due to re-franchising of beverage business in China. Organically, revenue grew 8% driven by volume growth for both snacks and beverages. Core operating profit declined 20% year over year in constant currency due to strong year-ago comparisons, which included a gain on sale of a business.
Adjusted earnings were $4.10 per share, which beat the Zacks Consensus Estimate of $4.06 by a 1%. Adjusted earnings declined 5.0% from the prior year in constant currency in line with management expectations.
In fiscal 2012, the company witnessed a 1.5% decline in revenues to $65.49 billion, slightly beating the Zacks Consensus Estimate of $65.29 billion. Organically, however, revenue grew 5%, in line with management expectation of growth in low single digits.
PepsiCo projects core constant currency earnings to increase in 2012 by 7% from 2011 core earnings of $4.10. The target is in line with management’s long term goal of high-single-digit core constant currency earnings growth. Currency headwinds are expected to reduce earnings growth by upto 1%, less than in 2012.
Excluding headwinds from currency and re-franchising of the beverage business in China and Mexico, organic revenues are expected to grow in the mid single digits, also in line with the long-term targets. These structural changes are expected to pull down organic revenue by 1%.
Commodity inflation is expected to be in the low-single digit range in 2013. The company expects its advertising/ marketing expense to increase at a rate higher than revenue. The core tax rate is expected to be approximately 27% for 2013.
PepsiCo plans to reinvest any excess earnings to support brand building, innovation and improve productivity, especially in the U.S. Productivity savings are expected to amount to $900 million in 2013.
New Share Buyback Program and Dividend Increase
Moreover, the company announced a new share buyback program worth $10 billion. The shares will be re-purchased between Jun 2013 and Jun 2016 after the current share repurchase program expires in June. The company also increased its annual dividend rate by 5.6% to $2.27 per share from $2.15 per share. The increased dividend will be first paid in June this year.
PepsiCo currently carries a Zacks Rank #3 (Hold). Unlike strong results by PepsiCo, rival, The Coca-Cola Company (KO - Analyst Report) reported mixed fourth quarter results this week; beating on earnings and lagging on sales. Yesterday, another beverage company, Dr Pepper Snapple (DPS - Analyst Report) announced dismal fourth quarter results missing Zacks expectations for both revenue and earnings.
You may consider investing in one of Coca-Cola’s bottling companies, Coca-Cola Hellenic Bottling Company S.A which carries a Zacks Rank #2 (Buy).