PepsiCo Stock Targets Record High After Earnings (PEP)

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PepsiCo, Inc. (NYSE:PEP) stock is closing in on an all-time high thanks to generally strong Pepsi earnings and — especially — some fresh financial engineering.PepsiCo Stock Targets Record High After Earnings (PEP)Sure, Pepsi earnings beat Wall Street estimates even as they declined, but the new $12 billion share repurchase program and dividend hike were what really goosed PepsiCo stock on Wednesday.

It also helps that PepsiCo stock has a critical advantage of over its biggest competitor.

PepsiCo is laboring under many of the same pressures its rival, The Coca-Cola Co (NYSE:KO) — a strong dollar, declining sales of fizzy drinks — but it has a secret weapon that its No. 1 competitor does not. It owns the Frito-Lay snacks business, and that’s been performing more than well.

Activist investor Nelson Peltz’s Trian Fund has been pushing PepsiCo to make the Frito-Lay snack business a separate publicly traded entity for about two years now. But the two sides recently called a truce, which is very good news for investors who advocate keeping the company together.

Although a spinoff would likely unlock value for a snacks business no longer held back by sluggish sales of carbonated beverages, there’s no way a Pepsico without Frito-Lay would be targeting record highs these days. Increasingly health-conscious consumers are shying away from drinks that contain sugar, high fructose corn syrup or artificial sweeteners, but they’ve maintained their taste for salty snacks.

Go figure.

Anyway, that’s been driving Pepsi earnings and share price for more than two years now. Indeed, PepsiCo stock is up 20% over the last 52 weeks versus an 8% gain for KO stock. Over three years, PepsiCo stock is up 50% against a 22% gain for KO.

That outperformance should continue through 2015. KO has already warned that the current year will be similar to last year’s disappointing performance. Pepsi earnings, driven by the Frito-Lay snacks business, could very well maintain its market-beating ways.

PepsiCo Stock Driven By North America, Snacks

For the most recent quarter, Pepsi earnings fell to $1.3 billion, or 87 cents a share, from $1.7 billion, or $1.12 a share, in last year’s period. On an adjusted basis, earnings came to $1.12 a share, which beat Street estimates for earnings per share of $1.08, according to a survey by Thomson Reuters.

Revenue slipped about 1% to almost $20 billion, but that also exceeded analysts’ forecast for sales of nearly $19.7 billion.

The big drag on results in the quarter was the ever-strengthening U.S. dollar, although PepsiCo’s reliance on the domestic market helped take some of the sting out of currency headwinds. The U.S. accounts for about half of all sales and two-thirds of profitability.

The snacks business, meanwhile, continued to roll, driven by a 3% gain in the North America segment. Moreover, the snacks business — which accounts for than a fifth of total sales — is helping support PepsiCo’s innovation push, which appears to be paying off. In the most recent quarter, new products accounted for 9% of sales, up from 7% a few years ago.

And if that weren’t enough to keep shareholders happy, as part of the PepsiCo earnings release, the company said it will return $8.5 billion to $9 billion to shareholders through dividends and share buybacks in 2015.

As part of that, PEP raised to dividend by 7% to $2.81 a share, but the largesse didn’t stop there. The company also announced a new share repurchase program providing for the repurchase of up to $12 billion of PepsiCo stocks by 2018.

PepsiCo has been gaining momentum for more than two years now on the strength of snacks and new products, and that should continue to suit it well in the months and years ahead.

Add in some very shareholder-friendly financial engineering, and there’s a lot to like in PepsiCo stock.

As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.

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Article printed from InvestorPlace Media, https://investorplace.com/2015/02/pepsico-stock-earnings-pep/.

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