PepsiCo Shakes Off Supply Chain Issues

PepsiCo Strategy Is Working, Let It Work For You

PepsiCo's NASDAQ: PEP Q3 results confirm a couple of things. Among them are widespread impacts of global supply chain issues but also the company's ability to navigate through those issues and still produce earnings growth. PepsiCo’s Faster Stronger Better program helped position the company for success by streamlining operations and focusing on the supply chain, and now the Pepsico Positive program should build on that success. Based on the results and our outlook for the dividend we think PepsiCo is still a high-quality choice for dividend growth investors. The stock is yielding nearly 3.0% with shares trading near $150 and it's a safe and growing yield at that.

PepsiCo Outperforms On The Top And Bottom Line

PepsiCo turned in a solid Q3 performance despite the issues plaguing the rest of the market. While supply chain issues impaired results the impact is negligible compared to what we've seen elsewhere in the market. The company reported $20.19 and net consolidated revenue which is good for a gain of 11.6% over last year. Revenue is also up sequentially and over the 2019 Q3 period and beat the consensus estimate by 410 basis points. Growth was driven by organic strength in all of Pepsi's operating segments and gives evidence to the success of Pepsi's diversification strategy.

On an organic basis, sales are up 9% over last year and compounded by a +2% tailwind from foreign exchange. On a segment basis, the core PepsiCo North America business is up 7% while Frito-Lay North America is up 6%. Quaker Foods, which got a significant boost from the pandemic and pantry loading craze, is up 2% over last year's double-digit gains while Latin America and the Emerging Markets/Asia all posted strong double-digit gains.

Moving down to the bottom line, the company experienced some margin shrinkage at both the gross and operating levels but far less than what others have reported. The gross margin shrank about 150 basis points to 53.47% while the operating margin shrank about 100 basis points to 15.65%. This drove GAAP earnings of  $1.60 and adjusted earnings of $1.79 which are mixed in relation to the analyst expectations. The GAAP earnings fell short of consensus by $0.10 and are down 3% from last year while adjusted earnings beat the consensus by $0.06 and are up $0.13 from last year. The GAAP earnings were impacted by higher provisions for pensions and taxes.

PepsiCo Guides Higher, But

PepsiCo issued favorable guidance but there is a caveat in the data. The company upped its target for organic revenue growth to about 8% from the previous 6% with EPS in the range of $6.20. Revenue guidance is above the Marketbeat.com consensus target but EPS guidance is not suggesting margin pressure will continue into the current quarter at least. The upshot is that cash flow and free cash flow remain strong leaving the dividend well-supported. 

Price action in PepsiCo moved higher in the wake of the Q3 earnings report but formed a red candle in early trading. This suggests some indecision and turnover in the market but we see higher prices down the road. Earnings growth is coming into serious question for the broad market so high-quality dividend growers like PepsiCo who are also growing the top and bottom lines should remain in favor. Key support is currently at the $150 level, if price action were to fall below that level there is a great risk of a deeper correction for the stock. Assuming support remains strong at $150 we see this stock moving back up to retest the recently set all-time high and resume the long-term uptrend.