PEP: Gauge Analysis (updated February 27, 2021)

I have analyzed PepsiCo's financial statements to determine whether the company's shares can be considered a good value and reasonable risk for prudent investors. My analytical approach was inspired by Benjamin Graham's recommendations in "The Intelligent Investor," which was first published in 1949 and is still one of the best-known books about value investing. I modified Graham's specific suggestions to fit modern times; however, the goal is the same: find stocks that are inexpensive relative to the company's strengths and aren't excessively risky.

The analysis uses gauges to assess how well the company satisfies seven specific investment criteria.  GREEN, YELLOW, and RED grades indicate whether the criteria are fully satisfied, partially satisfied, or not satisfied.  An Overall Score between zero and 100, which takes all gauges into account, is also computed.  While the analysis includes both growth and value criteria, the Overall Score calculation by design favors companies with good value characteristics over fast-growing, but expensive firms.  An Overall Score above 60 signifies the company is worth examining in more detail; a score over 80 is a rare accomplishment.

First, a quick review of the company itself.

PepsiCo is a global food and beverage company. In addition to the eponymous soft drinks, PepsiCo also sells bottled water, juices, coffee, and teas.  In April 2020, PepsiCo acquired energy drink maker Rockstar for $3.85 billion.  PepsiCo also owns the Frito-Lay snack food business, which is a significant contributor to the company's overall profits, and Quaker Foods. 

PepsiCo recorded profits of $7 billion, $5.13 per share, on revenue of $70 billion during the last 12 months.  In the quarter that ended on December 26, 2020, PepsiCo earned $1.33 per share on a GAAP basis, and it gained $1.47 per share after non-GAAP adjustments and exclusions.  See PepsiCo's most recent quarterly report and my review of their results relative to expectations for additional information.

Shares of PepsiCo now trade for about $129 each, giving the company a market value of $179 billion. These shares can be found in the Standard and Poors 500, Standard and Poors 100, Standard and Poors Dividend Aristocrats, NASDAQ 100, and Russell 1000 stock indices.

Analysis Results:

PepsiCo's grades on the seven investment criteria are listed below, along with some of the financial figures that influenced these color assignments

1. The Company's Size is Substantial: GREEN

    Market Value: $179.3 billion (mega-cap)

2. The Company is Conservatively Financed: RED

    Current ratio = 1.0 (>2.0 is conservative)

    Long-term debt/Equity = 298% (<100% is conservative)

3. The Company Generates Stable Earnings: YELLOW

    Nineteen positive quarterly earnings reports in last 5 years (almost perfect)

    Earnings variability = 28% (high)

4. The Company Exhibits Earnings Growth: YELLOW

    Owner Earnings growth rate (trailing year) = 14% (good)

    Owner Earnings growth rate (five-year average) = -3% (poor)

    Free Cash Flow growth rate (trailing year) = 18% (good)

    Free Cash Flow growth rate (five-year average) = -6% (poor)

5. The Company is Efficiently Profitable: GREEN

    Cash Flow Return On Invested Capital = 20% (good)

    Operating Profit/Sales = 14.3% (good)

6. The Company Pays a Healthy Dividend: YELLOW

    Dividends paid for the last 7 years or longer

    Dividend 5-year average growth rate = 8% (fair)

    Dividend = 88% of last year's FCF (sustainability is a significant concern)

7. The Company's Shares are Fairly Valued: RED

    Price/Owner Earnings (last year) = 28.2 (high)

    Price/GAAP Earnings (five-year average) = 24.1 (high)

    Free Cash Flow/Market Value = 3.6% (low, less than the five-year average of 4.0%)

    Acquirer's Multiple = 21.2 (expensive)

    Price/Book Value = 13.2 (about the same as its five-year average)

    Price/Sales = 2.5 (about the same as its five-year average)

In summary, the analysis assigned PepsiCo two GREEN, three YELLOW, and two RED grades.  The resulting Overall Score is 29 of the 100 possible points, which is low.  The score is below the 60-point GCFR threshold, and, therefore, PepsiCo does not satisfy the GCFR criteria for investment consideration at this time.

The share price would theoretically have to fall by 49.7 percent, from $129.19 to $65.01, all else being equal, to lift the Overall Score to the 60-point threshold. It is also possible that PepsiCo's future results will push the score up (or pull it down).  Revisit GCFR2 (https://gcfr2.com) occasionally for updates on PepsiCo's performance and the latest GCFR gauges and scores.

This analysis reported here is a limited evaluation of the subject company.  It does not consider all material facts about the company's operations, finances, or future prospects.  The analysis relies on publicly available financial data assumed, but not guaranteed, to be accurate and consistent.  Readers are strongly encouraged to verify all data and perform their own independent analyses.  Other analytical approaches and screening criteria will be more applicable to investors having different goals, circumstances, and tolerance for investment risk.  This post is not and should not be considered investment advice, nor does it constitute an offer or solicitation to buy or sell any security. The author might have a long or short position in the subject company and/or its competitors. The analytical approach, the criteria used, and all calculations are subject to change without notification.

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 #pepsico    #pep    #gauges  #gcfr  #gcfr2 #valueinvesting   #nac_financialanalysis

PEP: Earnings Report for the Quarter Ending December 26, 2020

PepsiCo reported before the market opened on February 11, 2021, it earned $1.33 per diluted share in the quarter that ended on December 26, 2020, up 6 percent from earnings of $1.26 in the equivalent 16 weeks of the previous year. These figures are the earnings determined in accordance with U.S. Generally Accepted Accounting Principles (GAAP). 

Core earnings, a non-GAAP figure, rose 1 percent to $1.47 per share from $1.45 one year earlier, a less robust change than the GAAP percentage. The most significant exclusions contributing to the $0.14 per share difference in the latest quarter between the GAAP and Non-GAAP earnings were: Mark to market impact [($0.05) per share], Restructuring and impairment charges [$0.09 per share], and Pension-related settlement charge [$0.11 per share].  Non-GAAP earnings, by excluding unusual and non-cash items that could obscure the results of a business's primary, ongoing operations, are intended to be cleaner measures of corporate profits.

This post compares the quarterly Income Statement published by PepsiCo to the estimates I made in a previous “Look Ahead” post.  My estimates were based on publicly available guidance provided by PepsiCo's management to financial analysts, news reports, and trends in the company's historical results.  Unless otherwise mentioned, all reported values mentioned below are GAAP figures.

First, a little background about the company:  PepsiCo is a global food and beverage company. In addition to the eponymous soft drinks, PepsiCo also owns the Frito-Lay snack food business. In April 2020, PepsiCo acquired energy drink maker Rockstar for $3.85 billion. PepsiCo bought SodaStream in 2018 for $3.2 billion.

The following table is a simplified version of PepsiCo's Income Statement for the quarter that ended in December 2020, with company-reported numbers along side my predictions.  Figures from the year-earlier quarter are also provided to facilitate comparisons.

Revenue in the December 2020 quarter totaled $22.5 billion, 9 percent more than last year.  The Beverages North America business was responsible for 30 percent of overall revenue, and this unit's revenue grew by 8.6 percent compared to the year-earlier result.  The Frito-Lay North America business contributed 24 percent of revenue, and this unit's revenue increased by 5.7 percent.  The Europe unit supplied 18 percent of revenue, and this business's revenue rose by 3.8 percent.

I was expecting PepsiCo to report revenue of $21.6 billion for the December 2020 quarter.  The actual amount surpassed my estimate by $855.0 million (4.0 percent).

The Cost of Revenue (also known as Cost of Goods Sold) was $10.4 billion in the latest quarter, which translates into a Gross Margin of 53.6 percent of revenue. Since it was lower than the 54.7 percent Gross Margin achieved in the year-earlier quarter, it's a sign that PepsiCo sold its products and services at less profitable prices relative to production costs. I was expecting the Gross Margin to be 55.0 percent in the December 2020 quarter, and PepsiCo missed that prediction by 1.4 percent.

Sales, General, and Administrative expenses totaled $9.2 billion in the December 2020 quarter, up 7.1 percent from one year ago.  SG&A expenses decreased from 41.6 percent to 41.0 percent of quarterly revenue, which shows PepsiCo spent less per dollar of sales on indirect operational costs, such as marketing. I had estimated that SG&A expenses would be 42.0 percent of revenue, and the actual percentage turned out to be lower than the prediction.

PepsiCo's Operating Income was $2.8 billion in the quarter, up 4.7 percent from the year-earlier period.  Operating Income exceeded my $2.8 billion estimate by $18 million.

Interest and other non-operating items summed to a net expense of $469 million.  My estimate for non-operating items was $350 million.

The effective income tax rate rose by 1.7 percent to 21.1 percent, which had a negative effect on net income.  I expected the tax rate to be 21.0 percent.

Net income attributable to PepsiCo was $1.8 billion, $1.33 per share in the quarter ending December 2020.  The figures for the year-earlier quarter were $1.8 billion, $1.26/share. My earnings estimate for  the latest quarter was $1.9 billion ($1.39/share), so PepsiCo earned $0.06 per share less than I had expected.

In conclusion, the following list shows where the reported results differed from my expectations:

      – Better than expected:  SG&A/Revenue 

      – Worse than expected:  Gross Margin + Misc non-operating items + Non-controlling interests 

      – Near expectations:  Revenue growth + SG&A + Interest + Income tax rate 

This post is not investment advice, and the accuracy of the information, tables, charts, and any commentary presented is not guaranteed.  Readers are encouraged to independently verify all data using information from original sources. The Income Statements discussed in these blog posts have not been audited and may differ in material respects from those published by the subject company.  These differences are intended to facilitate analysis and cross-company comparisons. Complete financial statements with notes can usually be found in the 10-Q and 10-K filings companies submit to the Securities and Exchange Commission (SEC).

 #pepsico    #pep    #gauges  #gcfr  #gcfr2 #QtrlyRpt   #nac_financialanalysis

PEP: Look Ahead to December 2020 Quarterly Results

This "look-ahead" post discusses how I came up with an estimate for PepsiCo's earnings for fiscal 2020's 16-week fourth quarter, which ended on December 26, 2020, by predicting each element of its Income Statement, from top-line Revenue to bottom-line Earnings Per Share (EPS) and everything in between.

Once the company’s official results become available on February 11, I will compare the published Income Statement to the prediction and identify any surprises, positive or negative.  Examining these differences can identify what factors (e.g., profit margins, non-GAAP expenses, tax rates, share buybacks) are driving changes to a company's financial performance.

But, before getting into the details, let's take a step back and start with background information about PepsiCo. 

PepsiCo is a global food and beverage company. In addition to the eponymous soft drinks, PepsiCo also owns the Frito-Lay snack food business. In April 2020, PepsiCo acquired energy drink maker Rockstar for $3.85 billion. PepsiCo bought SodaStream in 2018 for $3.2 billion.

Shares of PepsiCo now trade for about $140 each, giving the company a market value of $195 billion. These shares can be found in the Standard and Poors 500, Standard and Poors 100, Standard and Poors Dividend Aristocrats, NASDAQ 100, and Russell 1000 stock indices. 

PepsiCo recorded profits of $7 billion on revenue of $69 billion during the last year. In the quarter that ended on September 5, 2020, PepsiCo earned $1.66 per share (excluding certain items), which significantly beat the $1.49 Wall Street consensus forecast. 

Revenue in the September 2020 quarter totaled $18.1 billion, 5 percent more than last year's $17.2 billion. The Beverages North America business was responsible for 33 percent of overall revenue, and this unit's revenue grew by 5.6 percent compared to the year-earlier result. The Frito-Lay North America business contributed 24 percent of revenue, and this unit's revenue increased by 7.2 percent. The Europe unit supplied 18 percent of revenue, and this business's revenue rose by 3.1 percent.

My starting point, if available, when estimating earnings is guidance provided by the company's management to financial analysts.  It's true that the company may downplay expectations somewhat to avoid disappointments, but the top managers ought to know better than anyone else how well their products and services are selling.  I also look for other information about the company in the news, and I take advantage of trends in the company's historical results.  While it makes my task a little more difficult, I also try to estimate earnings that conform to Generally Accepted Accounting Principles (GAAP).  Non-GAAP results, which most professionals focus on, are somewhat arbitrary and often exclude meaningful items.

PepsiCo updated its guidance for the fiscal year and, thus, the fourth quarter, after the company last reported quarterly results.  The key elements of the guidance are excerpted below:

The Company provides guidance on a non-GAAP basis as we cannot predict certain elements which are included in reported GAAP results, including commodity mark-to-market net impacts.

Based on our year-to-date results and what we can reasonably forecast for the balance of this year, we are providing an update to our full-year financial outlook today. The Company now expects:

•Full-year organic revenue growth to be approximately 4 percent;

•Full-year core earnings per share of $5.50 compared to 2019 core earnings per share of $5.53; and

•Approximately $10 billion in cash from operating activities and free cash flow of approximately $6 billion, which assumes net capital spending of approximately $4 billion.

In addition, the Company continues to expect:

•A core effective tax rate of approximately 21 percent; and

•Total cash returns to shareholders of approximately $7.5 billion, comprised of dividends of approximately $5.5 billion and share repurchases of approximately $2 billion.

Note that the guidance refers to non-GAAP earnings, which makes my task a little more difficult and amplifies the uncertainty of my estimates.

In the first three quarters (only 36 weeks at PepsiCo, but that's another story) of fiscal year 2020, organic Revenue growth was 3.6 percent and GAAP Revenue growth was 3.0 percent.  To get to 4 percent organic growth across the full fiscal year, as the guidance predicts, I've assumed the difference between GAAP and non-GAAP revenue growth will remain 0.6 percent.  This suggests that 3.4 percent (4.0 - 0.6) is a plausible estimate for GAAP revenue growth for the fiscal year.

In fiscal year 2019, PepsiCo's revenue was $67.2 billion.  Fiscal year 2020's revenue could, therefore, be 1.034* $67.2 billion = $69.5 billion.  Revenue during the first three quarters of the year was $47.9 billion, which leaves $69.5 billion - $47.9 billion = $21.6 billion for the fourth quarter of fiscal 2020.

During the first three quarters of the year, PepsiCo's Gross Margin averaged 55.4 percent.  The margin the fourth quarter is usually a little less, so I have assumed it will be 55 percent.  The Cost of Goods Sold estimate is, therefore, (1-0.55) * $21.6 billion = $9.7 billion.

Sales, General, and Administrative (SG&A) expenses have averaged 40.4 percent of Revenue during the first three quarters.  In the fourth quarter, this ratio is often 2 to 3 percent higher.  I don't think it will be quite that high this year, but it could see 42 percent as a possibility.

These estimates would lead to Operating Income of $2.8 billion, up from $2.7 billion one year earlier.

I assume net interest paid would drop to $400 million in this era of low rates.

For the income tax rate, I used the non-GAAP estimate of 21 percent.  The difference between the GAAP and non-GAAP rates is usually small.

With these assumptions, my estimate for Net Income is $1.93 billion ($1.39 per share), which compares favorably to $1.77 billion (1.26/share) in the year-earlier period.

The following Income Statement summarizes the estimates made as discussed above. 

This post is not investment advice, and the accuracy of the information, tables, charts, and any commentary presented is not guaranteed.  Readers are encouraged to independently verify all data using information from original sources. The Income Statements discussed in these blog posts have not been audited and may differ in material respects from those published by the subject company.  These differences are intended to facilitate analysis and cross-company comparisons. Complete financial statements with notes can usually be found in the 10-Q and 10-K filings companies submit to the Securities and Exchange Commission (SEC).

#pepsico  #pep  #gauges #gcfr  #gcfr2 #lookahead #nac_financialanalysis

PepsiCo: Gauge Analysis (updated December 6, 2020)

I have analyzed PepsiCo's financial statements to determine whether the reported figures suggest that the company's shares are a good value and reasonable risk for prudent investors. The way I performed this analysis was inspired by Benjamin Graham's recommendations in "The Intelligent Investor," which was first published in 1949 and is still one of the best-known books about value investing. I modified Graham's specific suggestions to fit modern times; however, the goal is the same: find stocks that are inexpensive relative to the company's strengths and aren't excessively risky.

The analysis evaluates investment suitability by gauging how well the company satisfies seven criteria.  GREEN, YELLOW, and RED grades indicate whether each gauge is fully satisfied, partially satisfied, or not satisfied at all.  An Overall Score between zero and 100, which takes the details of all gauges into account, is also computed.  While the analysis includes both growth and value criteria, the calculation of the Overall Score has been designed to favor companies that exhibit good value characteristics over fast growing firms that are expensive.  An Overall Score above 60 isn't easy to achieve, and it signifies that the company has enough value-investment appeal to be worth examining in more detail. 

First, a quick review of the company itself.

PepsiCo is a global food and beverage company. In addition to the eponymous soft drinks, PepsiCo also owns the Frito-Lay snack food business. In April 2020, PepsiCo acquired energy drink maker Rockstar for $3.85 billion. PepsiCo bought SodaStream in 2018 for $3.2 billion.

PepsiCo recorded profits of $7 billion on revenue of $69 billion during the last year. In the quarter that ended on 5 September 2020, PepsiCo earned $1.66 per share (excluding certain items), which significantly beat the $1.49 Wall Street consensus forecast. See https://tinyurl.com/y5gp5s3m for PepsiCo's most recent quarterly report.

Shares of PepsiCo now trade for about $146 each.  These shares can be found in the Standard and Poors 500, Standard and Poors 100, Standard and Poors Dividend Aristocrats, NASDAQ 100, and Russell 1000 stock indices.

Analysis Results:

PepsiCo's grades on the seven investment criteria are listed below, along with some of the financial figures that influenced these color assignments

1. The Company's Size is Substantial: GREEN

    Market Value: $202.7 billion (mega-cap)

2. The Company is Conservatively Financed: RED

    Current ratio = 0.9 (>2.0 is conservative)

    Long-term debt/Equity = 279% (<100% is conservative)

3. The Company Generates Stable Earnings: YELLOW

    Nineteen positive quarterly earnings reports in last 5 years (almost perfect)

    Earnings variability = 28% (high)

4. The Company Exhibits Earnings Growth: RED

    Owner Earnings growth rate (trailing year) = -6% (poor)

    Owner Earnings growth rate (five-year average) = -7% (poor)

    Free Cash Flow growth rate (trailing year) = 5% (weak)

    Free Cash Flow growth rate (five-year average) = -5% (poor)

5. The Company is Efficiently Profitable: GREEN

    Cash Flow Return On Invested Capital = 20% (good)

    Operating Profit/Sales = 14.5% (good)

6. The Company Pays a Healthy Dividend: YELLOW

    Dividends paid for the last 7 years or longer

    Dividend 5-year average growth rate = 8% (fair)

    Dividend = 87% of last year's FCF (sustainability is a significant concern)

7. The Company's Shares are Fairly Valued: RED

    Price/Owner Earnings (last year) = 38.8 (very expensive)

    Price/GAAP Earnings (five-year average) = 27.3 (high)

    Free Cash Flow/Market Value = 3.1% (low, less than the five-year average of 4.0%)

    Acquirer's Multiple = 23.9 (expensive)

    Price/Book Value = 14.9 (more expensive than the five-year average of 13.3)

    Price/Sales = 3.0 (more expensive than the five-year average of 2.6)

In summary, the analysis assigned PepsiCo two GREEN, two YELLOW, and three RED grades.  The resulting Overall Score is 25 of the 100 possible points, which is low.  The score is below the 60-point GCFR threshold, and, therefore, PepsiCo does not satisfy the GCFR criteria for value-investment consideration at this time.

The Overall Score would only increase to 51 points if the share price were to fall by 50%, from $145.85 to $72.66, all else being equal. Or, perhaps, the next earnings report from PepsiCo will include results that move the company's score up towards the threshold (or sink the score further).  Check this blog occasionally for updates on PepsiCo's performance and the resulting GCFR score.

This analysis reported here is a limited evaluation of the subject company.  It does not consider all material facts about the company's operations, finances, or future prospects.  The analysis relies on publicly available financial data assumed, but not guaranteed, to be accurate and consistent.  Readers are strongly encouraged to perform verify all data and perform their own independent analyses.  Other analytical approaches and screening criteria will be more applicable to investors having different goals, circumstances, and tolerance for investment risk.  This post is not and should not be considered investment advice, nor does it constitute an offer or solicitation to buy or sell any security. The author might have a long or short position in the subject company and/or its competitors. The analytical approach, the criteria used, and all calculations are subject to change without notification.

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 #pepsico    #pep    #gauges  #gcfr  #gcfr2 #valueinvesting   #nac_financialanalysis