PepsiCo, Inc.: PEP Stock Isn’t as Strong as It Seems

Strong dollar undermines PepsiCo's growth

This morning PepsiCo, Inc. (NYSE:PEP) reported earnings that beat analysts’ expectations. With an adjusted earnings per share for the second quarter of $1.35 vs $1.29 expected, while revenues for the quarter-matched analysts’ expectations, hitting $15.4 billion.

PepsiCo, Inc.: PEP Stock Isn't as Strong as It SeemsAdding positive guidance to a beat, PepsiCo management raised EPS guidance for the year to $4.71 from $4.66. Moreover, PEP announced it would return $7 billion to shareholders through dividends and buybacks.

All of this suggests that PepsiCo’s executives are confident in the company’s performance for the rest of the year.

But while PEP Stock’s operating results were solid, the overall results, including all the various segments, are much less upbeat and warrant caution.

How PEP Stock Beat Expectations

Organic volume growth, which focuses on unit growth without all of the external factors, did OK. The company’s snack division, Frito-Lay, grew by 2% in volume and the AMENA division (Asia, Middle East and North Africa) gained 4% in organic volume growth year-over-year.

The North American Beverages unit grew by 2% in organic volume growth, suggesting the drag from weak soda sales has eased.

Overall, organic volume growth for all of PepsiCo’s segments combined hit 2.5%, which is not jaw dropping, but still a pretty solid number.

However, once we take a look at the actual numbers, PEP stock earnings become much less impressive.

Revenue in total for PepsiCo was down 3% YoY. Sales in Latin America fell by 23%, in Europe Sub-Saharan Africa sales were down by 5% YoY and in Asia, Middle East and North Africa sales fell by 1.5% YoY.

What eroded PEP’s revenue? The strength of the dollar … or more accurately, the weakness of foreign currencies. The foreign exchange impact shaved 4% of the total revenue growth YoY from PEP stock’s top line with Europe and Sub-Saharan Africa sales hit by 5% YoY from foreign exchange.

The most severe impact came from the company’s Latin American division that was hit by 12%, due to weakness in Latin American currencies that accompanied the fallout from PepsiCo’s failed venture in Venezuela.

That is a rather severe impact and it’s hard to ignore. Although investors — at times — like to shrug off foreign exchange impact and focus on organic growth, this time around it’s different. This indicates that PepsiCo’s pricing power is constantly eroding as foreign currencies keep losing value.

That’s a big problem, and it isn’t going away. With the Brexit now looming, PEP stock could experience even more headwinds down the road due to geopolitical stability and the dollar continuing to appreciate further.

PEP stock was eventually able to grow EPS by 4% YoY, but that was thanks to an aggressive cost-cutting scheme that is expected to save PepsiCo a total of $1 billion by year’s end. However, there is a limit to how much PEP stock can cut its way to profits, and a 2.5% increase in volume growth is solid, but hardly enough to turn the tide.

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

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Article printed from InvestorPlace Media, https://investorplace.com/2016/07/pepsico-inc-pep-stock-isnt-as-strong-as-it-seems/.

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