Morningstar | Pepsi's Shares Pop on Solid 2Q Results; Shares Remain Modestly Undervalued
Wide-moat Pepsi's second-quarter results largely tracked in line with our full-year outlook, with net revenue up 2.4% (versus our 3% estimate) and gross margin of nearly 55% (comparable to our estimate). We're pleased both the food and beverage segments experienced organic volume growth (up 1% and 0.5%, respectively), primarily driven by strength in international markets (roughly 40% of consolidated sales). In this context, the Europe Sub-Saharan Africa segment (19% of sales this quarter) posted 7% organic growth and the Asia, Middle East and North Africa segment (10% of sales) posted 6% organic growth. Management claimed developing and emerging markets grew 6% in the quarter, on an organic basis, in line with our view that rising per-capita consumption and new product launches in these regions will fuel sales growth longer term. Given these results, we aren't expecting material changes to our $123 fair value estimate and continue to view shares as attractive, despite a mid-single-digit uptick following results.We think performance in the firm's North American beverage business, which has averaged roughly 3% declines the last 12 months, seems to be trending in the right direction as the firm's investments behind its core beverage brands (such as increased media spending for trademark Pepsi) begin to take hold. As evidence, volumes in this business were down just 2%, versus a 3% decline in the first quarter, even though pricing within this segment remains solid (up 1% during the quarter). Further product innovation, including recently launched Gatorade Zero and the return of seasonal brand Mountain Dew Baja Blast, should help to sustain positive momentum across its largest beverage brands over the remainder of the year. Overall, we posit its enviable portfolio of beverage and food brands (with 22 brands that each generate $1 billion in annual sales) has helped it ingrain itself in retailers' supply chains and secure valuable shelf space, supporting its edge.
PepsiCo is a food and beverage company. The company's segments include: Frito-Lay North America, which includes food and snack businesses in the United States and Canada; Quaker Foods North America, which includes cereal, rice, pasta and other food businesses in the United States and Canada; PepsiCo Beverages North America, which includes beverage businesses in the United States and Canada; Latin America, which includes beverage, food and snack businesses in Latin America; Europe, which includes beverage, food and snack businesses in Europe; and Africa, Middle East and South Asia, which includes beverage, food and snack businesses in Africa, the Middle East and South Asia.
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