PepsiCo Bubbles To New Highs On Earnings Outlook

Take A Bite Out Of PepsiCo If You Haven't Already 

There are a couple of fantastic growth stories in the consumer staples sector and PepsiCo NASDAQ: PEP is one of them. The company's strategy to diversify into snacks and other food items helped position it not only for the pandemic but for long-term growth as well. While competitor Coca-Cola NYSE: KO was struggling with the loss of food-away-from-home sales PepsiCo was thriving on its snack and breakfast foods business and focus on retail channels. PepsiCo has been one of our top picks for the last year and it doesn't look like it's going to lose its place on the list anytime soon.

PepsiCo Results Are Faster, Stronger, And Better

PepsiCo’s strategy for growth is called Faster, Stronger, and Better and it's working. The company has been investing in its brands, supply chain, manufacturing capacity, and go-to-market systems which are all helping to drive growth in revenue and earnings. Not only is the company still growing but growth is still accelerating on a YOY basis and we think this trend may continue into the end of the year. 

The fiscal second-quarter consolidated revenue of $19.22 billion is up 20.5% from last year and 1300 basis points stronger than growth in the previous quarter. The revenue is also up 17% from the 2019 calendar second quarter and beat the consensus estimate by 700 basis points. No matter how you slice it, Pepsi's revenue is strong and it's growing.

On a segment basis, Pepsi's growth markets were the strongest but it produced strong growth in all but one segment. The Africa Middle East and South Asia segment saw Revenue grow 63% while Asia-Pacific, Australia, and New Zealand including China grew by 41%. Europe, Latin America, and PepsiCo Beverages North America all grew in the range of 21 to 26% while Frito-Lay North America grew by 7%. Quaker Foods North America was the only area of weakness and it shrank by 13% from last year. The caveat here is that the 13% decline is versus last year's double-digit gains that were driven by pantry loading activities.

Foreign exchange had an impact on revenue and earnings but it is negligible in light of the company's strength in revenue and earnings growth. Foreign exchange impacted revenue by 300 basis points and GAAP earnings by 400 basis points but margins and GAAP earnings are widening without that tailwind. The company's GAAP EPS of $1.70  is up 44% from last year and beat the consensus by $0.18 and the adjusted earnings were also strong at $1.72 or $0.19 better than expected.

The best news is that the company is expecting revenue and earnings to persist in the second half and has guided accordingly. PepsiCo is now expecting to deliver 6% organic growth versus the previous guidance of mid-single digits and for earnings to come in near $6.20 versus the current expectation of $6.09. It is our opinion that Pepsi will raise its guidance again at the end of the current quarter.

PepsiCo Reaffirms Outlook For Capital Returns

PepsiCo reaffirmed its outlook for capital returns to be in the range of $5.90 billion. This assumes the incremental increase in both the buybacks and the dividend initiated last quarter will continue. In our view, it is highly likely that PepsiCo will increase its dividend for a 50th consecutive year at the end of this fiscal year but we think the stock would be a by even without a dividend increase. At current price levels, PepsiCo is yielding about 2.9% and well above the broad market average.

The Technical Outlook: PepsiCo Breaks Out To A New High

Shares of PepsiCo are rocketing higher on the results and the outlook and have moved up more than 2.2% in early trading. This move includes a small gap-up at the open and puts the stock at a new all-time high. Now that shares have broken out we think they will rise to the $155 to $160 range in the near term and then consolidate for a move higher later in the year.