Morningstar | Strengthened Pricing Benefits Pepsi's Organic Sales and Profitability in 1Q; Shares Fairly Valued
Wide-moat Pepsi began 2019 on a strong note, with organic sales up 5% in the first quarter (slightly ahead of our 4% full-year estimate) and operating margin expanding 120 basis points to 15.6% (matching our full-year estimate). We don't expect a material change to our $122 fair value estimate as we evaluate these results, and we reiterate our outlook for 3%-4% organic growth and midteens operating margin over the next five years. Continued strength in Frito-Lay North America (30% of sales) and sustained recovery in the North American beverage business (35% of sales) were the highlights of the quarter, in our view. Pricing remained solid (up 4.5%), which we think suggests that Pepsi’s brand intangible assets, which underpin its competitive edge, remain healthy.Frito-Lay North America posted an impressive 5.5% lift in sales on a 3% increase in volume, thanks to mid-single-digit growth in brands like Doritos and Ruffles as well as categorywide tailwinds resulting from consumers’ desire for more convenient fare. Strong pricing and supply chain improvements bolstered profitability in this business, with segment operating margin expanding 140 basis points to around 30.4%. In the North American beverage business, a 4% increase in pricing (marking the third quarter of sequential acceleration for this metric) more than offset a 2% decline in volume. From a category perspective, carbonated soft drink volume fell 4% while the water portfolio posted a high-single-digit increase (as brands like LIFEWTR continue to increase their velocity). We think Pepsi’s reinforced investments behind its product portfolio (we expect combined research and development and advertising spending will amount to more than 7% of sales over our forecast, comparable to the firm’s five-year historical average) will allow the company to bring innovative new products and packaging formats to market, supporting further improvement in this business.
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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Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
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