Pepsi Looks A Snack

Pepsi's strong second quarter

Image source: Fat Jackey, Al.geba, Lilu330 - Shutterstock

What's going on?

Drinks and snacks magnate PepsiCo reported better-than-expected second-quarter sales and profit on Tuesday – but its shares didn’t fizz.

What does this mean?

Last quarter, Pepsi’s “organic” revenue growth (which excludes the impact of recently bought businesses and currency swings – the US dollar’s value has risen, lowering the value of Pepsi’s earnings from abroad) was 4.5%, beating investors’ forecasts. Compared to the same time last year, Pepsi sold more actual products – and, given its increased gross profit margin, probably managed to raise their prices too.

Investors are braced for second-quarter earnings declines and have been lowering their forecasts for the third quarter too. But for the rest of 2019, Pepsi still thinks its profit will be on par with what investors expect – a little less than last year. So investors might see Pepsi’s steadfast prediction as an effervescent spot in what may prove an otherwise flat quarter.

Why should I care?

For markets: Pepsi’s missing Mentos

Pepsi shares have risen 20% this year – twice as much as those of its arch-nemesis Coca-Cola – but they fell on Tuesday. With Pepsi having eclipsed expectations in eight out of its last nine reports, several investors may have chosen to sell and lock in a profit. That winning streak might be thanks to the 50% of Pepsi’s sales coming from its snacks segment – where, in developed markets, it’s benefiting from consumers buying more healthy snacks. And, despite sugar taxes in some emerging markets, consumers there are still, uh, sweet on carbonated drinks.

The bigger picture: Conceding to the defense.

Consumer staples companies like Pepsi which sell basic food and drink products are considered “defensive”: in an economic downturn, consumers tend to keep buying their goods, resulting in stable earnings. Investors may therefore see Pepsi’s annual dividend as reliable and look forward to the estimated $8 billion it’ll give investors this year (including by buying back stock). That’ll make 2019 the 47th year running that Pepsi’s increased its payout (tweet this).

Originally posted as part of the Finimize daily email.

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