“We've seen this dynamic since just after Easter, and it has been broad-based across many categories and competitors. And importantly, where we see it, it is usually not a trade down to lower-priced alternatives within the category. Rather, it's an overall category slowdown.” – Conagra 7/13/23
Opill approval (PRGO)
Perrigo announced yesterday that the FDA has approved Opill for OTC use. Opill is the first daily oral contraceptive sold OTC. Opill is a progestin-only birth control that has been in use for nearly half a century. Approving it for OTC use will make it more accessible. In May, the FDA’s advisory committee recommended Opill’s approval unanimously. Opill we be available for sale at retailers in Q1. The company has estimated first-year sales of $100M. Our revenue estimate is between $100-200M. Perrigo would be the exclusive OTC supplier for three years. Opill is currently not reflected in our estimates or consensus estimates. The political environment post-Dobbs v. Jackson Women’s Health Organization assisted in the approval of a drug that has a long safety record. The odds of FDA approval were much higher after the advisory committee's recommendation.
Q2 upside (PEP)
Pepsi reported EPS of $2.09, representing 15% growth, vs. $1.96 consensus, above the high end of the estimate range. Organic revenue growth of 13% was also above expectations of 10.3% with notable upside in Frito Lay (+14%) and Europe (+19%). Many of the company’s key regions and segments continued to see double digit growth driven by price increases and upside in volume growth.
Core gross margins expanded 130bps and operating margins expanded 44bps driven by productivity gains. Despite increased advertising and marketing spend as a percentage of revenue increasing by 50bps, productivity gains are driving margin expansion. Management expects operating margins to continue to expand further in the 2H.
Management raised organic revenue growth guidance to 10% from 8%. EPS growth was raised from 9% to 12%. We are raising our 2023 estimates to reflect further margin expansion in the 2H. Pepsi is a best idea long.
We are raising PepsiCo two spots on our Best Idea long list. Our updated position monitor:
Food Manufacturing PPI (HSY)
The PPI for food manufacturing decreased by 1.3% in June, decelerating from -0.4% in May. June was the second straight month of lower manufacturing prices as seen in the chart below. It will be difficult for the industry to raise prices in the 2H with some competitors seeing lower manufacturing costs while the consumer’s budget is under more strain.
The PPI for chocolate and confectionery PPI increased 10.0% YOY, accelerating from 8.6%. The inflationary pressures in chocolate will keep the manufacturers raising prices in the 2H of the year in contrast to other food manufacturers. Hershey also has volume growth driven in part by additional capacity.
CEO ouster (APPH)
AppHarvest has replaced founder and CEO Jonathan Webb with Tony Martin, an indoor grow veteran. Considering the looming threat of losing its facilities due to a domino effect from a foreclosure at one facility it seems an effort too late. Jonathan Webb was perhaps the most overly promotional CEO I have ever covered.
