Pepsico Q2 demonstrates internal hedges
Pepsico reported Q2 EPS of $1.32 vs. consensus of $1.25 and top-line results 1.5% ahead of consensus. Organic revenue declined 0.3% with global snacks +5% offset by global beverages -7%. Quaker Foods' organic growth was 23% driven by the shift to food at home. Pepsico said the 200bps of margin contraction (~$.21) was due to $378M of incremental COVID-19 costs. Growth in snacks and packaged foods offset the on-premise beverage declines. In the North, America, beverages declined 6.6% while Frito-Lay grew 6.6%. Internationally snacks grew 2% while beverages declined 5%. Price/mix was up 1.5%, driven by a 3% increase in the North American beverages business mostly due to lower promotions.
As the economy opens up, management said the beverages business has improved while the snacks business will see less of a tailwind. The company's multiple of 25x 2020 EPS estimates is deserved given the ability of some businesses to offset the challenges of others depending upon the environment. The beverages business will likely see a slower recovery in the 2H with reopening phases being reversed in North America. However, beverages in 2021 will see the revamped energy drinks portfolio combined with growth in food away from home and increased marketing, driving the best revenue growth in years.
We expect 2H EPS estimates to be revised slightly lower (management is not providing guidance), but at the same time expect 2021 EPS to come in above consensus expectations due to better top line (beverages) and margins (lapping COVID-19 expenses). Pepsico is currently on our Long bias list, but we look to be more constructive when EPS revisions become positive at a lower valuation/negative sentiment.
UK CPG sales slow to lowest growth rate since mid-April shutdown (NOMD)
England reopened pubs and restaurants on July 4, Wales opened pub gardens and outdoor seating for restaurants yesterday, and Scotland reopens pubs and restaurants on July 15. For the week ended July 4, total CPG demand in the U.K. decelerated to 4% higher YOY. Total edible categories decelerated to +9% for the week ended July 4 from +12% sequentially. Total non-edible categories were up 4% YOY from +2% sequentially. The frozen category decelerated to +14% from +21% sequentially as seen in the following chart. The frozen category has generally been the second strongest category after alcohol during the pandemic in the U.K. The non-edible categories have been much less volatile, hovering between +4% to +7% for seven of the past nine weeks. The U.K. is Nomad Foods' largest market at 31% of sales.
Vital Farms plans for an IPO (VITL)
Vital Farms filed its IPO plans in its registration statement on Friday. Vital Farms describes itself as an ethical food company that is disrupting the U.S. food system. The company is the leading U.S. brand of pasture-raised eggs and butter. Vital Farms' revenue has grown at a 33% CAGR from 2015 to 2019. It is the second-largest U.S. egg brand despite only having 2% household penetration. Roughly 90% of its revenue ($129M) is from eggs. The company's largest customers are Whole Foods at 31%, Kroger at 14%, and Sprouts Farmers Market at 8%. In the future, the company could expand into additional dairy products. The IPO comes at a relatively early stage of the company's potential growth as it is still heavily egg-based. The revenue base is similar to Annie's when it went public. However, Annie's had established product lines in crackers, fruit snacks, and graham crackers. One of the challenges for the company is that many of the retailers may offer similar products as private label brands. Having students attend school would also boost sales. Until it can prove its brand can carry beyond shell eggs, it would seem to be a less likely acquisition target. With plenty of growth potential and a much smaller offering, the IPO is probably better received than Albertsons has been. Maybe there are more small-cap ESG funds than we thought?
