EUR 850.00 For Business Accounts Only

Morningstar | Pepsi's Long-Term Strategy Should Remain Intact Following Its CEO Transition

We're maintaining our Exemplary stewardship rating for wide-moat PepsiCo after the company announced that CEO Indra Nooyi, 62, will step down on Oct. 3 after 24 years with the company, including 12 years in its top spot. Nooyi will be succeeded by Ramon Laguarta, who has been president of the company since 2017 and has experience as the CEO of Pepsi’s Europe Sub-Saharan Africa business and president of its Eastern Europe region. We weren't surprised by Laguarta's appointment, given that each of the firm's previous five CEOs have been chosen from within the organization, which we view as evidence of its deep bench.

We don't foresee a material shift in Pepsi's strategy with Laguarta at the helm, given his 22-year tenure at the firm, extensive knowledge of its operations, and key role in setting its strategy as president. Under Nooyi's leadership, the company bolstered its portfolio of healthier offerings, which now contribute roughly half of sales compared with about 38% in 2006, and better aligned its portfolio with evolving consumer tastes (with above 5% compound sales growth over this period). As such, we posit that this bent toward more natural and wholesome fare will continue. We expect Pepsi will reinforce its brand-related investments, with combined expenditures on advertising and research and development approximating 7% of sales over the next 10 years, in line with historical rates. We contend that these investments will help the company develop and bring new products to market, ensuring that its competitive advantage remains unwavering. In this context, we're reiterating our $123 fair value estimate, which calls for 3% top-line growth and operating margin around 18% on average over our forecast period.

We also expect Pepsi's record of prudent capital allocation, with adjusted returns on invested capital averaging north of 30% over the last decade, and substantial shareholder returns, with dividends and share repurchases totaling over $6 billion in 2017, to continue under Laguarta's leadership. Its annual dividend has increased for more than 40 years and currently yields above 3%.

Our favorable view of the combination of Pepsi's food and beverage businesses remains unchanged. Nooyi had been a strong advocate for the strategic benefits of keeping these businesses integrated, and we surmise that Laguarta's lengthy tenure with the company should preclude a significant change of opinion on this matter. From our perspective, this structure has allowed Pepsi to capture synergies in marketing, distribution, in-store execution, and technology, thereby reinforcing its competitive edge. The firm's leading position across the snack and beverage categories, with 22 brands that generate above $1 billion in annual sales, has entrenched its role in retail and food-service supply chains. Moreover, the additional scale generated by combining these segments has helped Pepsi form economies of scale and strengthen its foothold in international markets, giving it a cost edge over smaller food and beverage peers.