Frito-Lay potato chips and Aunt Jemima syrup to the rescue for PepsiCo (PEP).
The beverage and snacks giant surprised more than a few on Wall Street Tuesday with its better than expected first quarter, which showed impressive sales gains across most of its product portfolio as consumers stocked up to eat at home during the coronavirus pandemic. Keep in mind the report is a week removed from a rather downbeat earnings day from PepsiCo rival Coca-Cola, which warned that global volume has fallen off a cliff in April.
Unlike PepsiCo, Coca-Cola (KO) lacks a snacks division (which is what people are stocking up on right now as they are quarantined). Moreover, Coca-Cola has close to 50% of its sales leveraged to away from drinking occasions (restaurants, sporting events, etc.) compared to high teens for PepsiCo.
“It’s holding up well,” PepsiCo Vice chairman and CFO Hugh Johnston said on Yahoo Finance’s The First Trade about current business trends. Johnston also sits on Microsoft’s board of directors.
Johnston added, “You saw a lot of stocking up on water and Gatorade and things like that. But there’s real consumption changes, in particular in two areas. Number one is breakfast at home. People are eating more pancakes and they’re those products. Second, people are working from home and they’re tending to graze more during the day. So we have seen real increases in snacking. As a result, that demand is sustaining. The beverage business is more challenging in that regard as the away from home channels have either shutdown and are quite limited.”
PepsiCo shares rose 2% in afternoon trading.
Here’s how PepsiCo performed in the first quarter:
Net Sales: $13.9 billion vs. estimates for $13.19 billion
Organic Revenue Growth: +7.9% vs. estimates for 3.6%
Frito Lay Organic Revenue Growth: +7% vs. estimates for +5.5%
Quaker Foods Organic Revenue Growth: +7% vs. estimates for -1%
North America Beverages Organic Revenue Growth: +6% vs. estimates for +2.5%
Operating Profits: $2.12 billion vs. estimates for $2.14 billion
Diluted EPS: $1.07 vs. estimates for $1.03
Guidance: PepsiCo withdrew guidance. Prior ranges:
Benefitting from at-home consumption
To the aggressor often goes the spoils. In that vein, PepsiCo is proving to be the more aggressive company relative to Coca-Cola at the moment and may continue to see its stock relatively outperform because of it.
PepsiCo said Tuesday it still plans to repurchase $2 billion in stock this year. Coca-Cola has yanked its repurchase activity for the year. PepsiCo just closed on its deal for energy drink maker Rockstar. It unveiled Tuesday a new exclusive distribution deal with red-hot energy drink brand Bang. Coca-Cola said it doesn’t expect to see any significant M&A activity this year.
And then there are the different fundamental make-ups of the two companies. The current health pandemic — which is likely to be around for some time —is playing into PepsiCo’s core leadership position in snacks. Coke’s beverage-led business is at the mercy of when government decide restaurants could reopen along with sports.
“With a sales mix that skews towards snacks which benefit from at-home consumption, we see a relative favorable risk/reward over the next 12 months and believe PEP is one of the few large-cap names where we see limited downside risk from a multiple perspective,” says JPMorgan analyst Andrea Teixeira.
Syrup and diet soda for breakfast are a winning combo for many humans right now — and apparently its maker, PepsiCo.
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