HEDGEYE OPINION
PEP reported 3Q16 results this morning that beat estimates on most accounts and raised guidance for the full year 2016. Although only on our LONG bench, we continue to like PEP as a long term investment and feel that they are one of the best positioned companies in the space. Strong fundamental performance coupled with style factors that are ideal for turbulent times in the market, make PEP a safe pick.
As the packaged food space has been turned on its head by 3G and Zero Based Budgeting, PEP has taken a more methodical approach to this process. Although they have implemented a cost savings program through their $5 billion, 5 year productivity plan, they are continuing to invest in the long-term prosperity of the business. The three core buckets that they are focused on investing in are; Advertising & Marketing (up 60bps YTD), R&D and general productivity investments, such as their updated ERP system which is one example of driving redundant costs out of the business. Notably, 2016 has a 53rd week, which will have a 1% benefit to the top line, but no benefit to the bottom line as management plans to reinvest it into incremental growth initiatives.
We saw nice flow through in the quarter from their initiatives with core gross margins expanding 80bps, and core operating margins expanding 85bps. This expansion was driven by revenue management strategies and productivity gains, partially offset by a 60bps increase in A&M as a percent of sales.
QUICK COMPS:
- Revenue: $16.03 billion, beating Factset’s $15.87 billion estimate
- Net revenue decline of 1.9%, foreign exchange translation and the Venezuela deconsolidation each had a 3% unfavorable impact on reported net revenue
- Organic Revenue growth: +4.2% vs Consensus +2.7%
- EPS: $1.40 vs Est. $1.29
VOLUME (ORGANIC):
- Frito-Lay North America +2% vs consensus +3.7%
- Quaker Foods North America (2%) vs consensus +1.3%
- North America Beverages +2% vs consensus (0.8%)
Latin America
- Snacks +3.5%
- Beverages (3%)
ESSA
- Snacks +3%
- Beverages +2%
AMENA
- Snacks +10%
- Beverages +5%
NET REVENUES:
- Frito-Lay North America $3.68B vs consensus $3.67B
- Quaker Foods North America $571M vs consensus $583.3M
- North America Beverages $5.52B vs consensus $5.28B
- Latin America $1.76B vs consensus $1.74B
- ESSA $2.86B vs consensus $2.80B
- AMENA $1.64B vs consensus $1.69B
ORGANIC REVENUE GROWTH:
- Total +4.2% vs consensus +2.7%
- Frito-Lay North America +3.5% vs consensus +3.7%
- Quaker Foods North America (2%) vs consensus +1.3%
- North America Beverages +3% vs consensus (0.8%)
- Latin America +10% vs consensus +6.8%
- ESSA +5% vs consensus +2.7%
- AMENA +5% vs consensus +6.2%
OPERATING PROFIT (ADJUSTED):
- Frito-Lay North America $1.15B vs consensus $1.13B
- Quaker Foods North America $144M vs consensus $151.3M
- North America Beverages $910M vs consensus $805.8M
- Latin America $247M vs consensus $246.5M
- ESSA $399M vs consensus $386.3M
- AMENA $268M vs consensus $288.8M
FY 2016 GUIDANCE:
- EPS $4.78, ex-items vs prior guidance of $4.71 and FactSet $4.76
- Reaffirms organic revenue growth of 4%
- Foreign exchange translation to negatively impact reported net revenue growth by approximately 3 percentage points vs. prior guidance of a -4% impact
- More than $10 billion in cash flow from operating activities and more than $7 billion in free cash flow
- Expect to return approximately $7 billion to shareholder through dividends of approximately $4 billion and share repurchases of approximately $3 billion
- Expecting low-single-digit deflation excluding the impact of transaction-related foreign exchange
- Productivity savings of approximately $1 billion
Please call or e-mail with any questions.
Howard Penney
Managing Director
Shayne Laidlaw
Analyst
