Piece Written By Nkosilathi Dube, Trive Financial Market Analyst 

Despite facing a backdrop of declining demand for its array of products, Pepsico Inc (ISIN: US7134481081) showcased its strategic prowess by posting standout financial results. Earnings per share rose to $2.09, surpassing predictions by an impressive 6.48%. Simultaneously, the company’s revenue surged to $22.32 billion, a remarkable feat that outpaced estimates by 2.73%. 

However, navigating these stellar figures wasn’t without its challenges. The company found itself grappling with a drop in volumes due to the ripple effects of strategic price hikes over the last two years. These calculated increases aimed to mitigate mounting costs across the production spectrum, from raw materials to transportation. 

Remarkably, the decline in demand wasn’t as pronounced as initially feared. This resilience is attributed to the prevailing global employment stability, as executives note that the low unemployment rates have played a pivotal role in sustaining consumption. 

As Pepsico charts its course forward, it aims to resume its customary pricing strategy in the coming months. This bold move reflects the company’s anticipation of a steady economic trajectory and an unwavering commitment to its consumer base. 

Técnicos 

Riding the wave of an ascending channel pattern, the share price has showcased resilience, trading above its 100-day moving average with unwavering determination. 

As the year unfolds, Pepsico’s stock approaches the potential milestone of a fifth consecutive year of gains, a feat that underscores its strong market positioning. Notably, support at $170.96 per share emerged after a rapid rebound from the lower trendline of the ascending channel, sparking a notable surge since March 13, 2023. This bullish momentum was only momentarily interrupted by a solitary week of decline amidst a span of nine. 

Yet, the stock’s ascent met with a formidable adversary at the upper trendline of the ascending channel, leading to a reversal near the $196.88 per share threshold. A swift turnaround directed the stock’s trajectory towards the 61.80% Fibonacci Retracement Golden Ratio, standing as a vital intermediate support level. 

Market sentiment now stands at a crossroads. Should the Golden Ratio prove its mettle as a support, an optimistic resurgence beckons, potentially targeting the notable $196.88 per share level as an upside significance level. Conversely, a high volume breakdown below this key ratio could herald impending downside pressure, directing focus towards the lower trendline of the ascending channel.  

Fundamentales 

The beverage and snack behemoth reported a robust 10.37% revenue growth, reaching a remarkable $22.32 billion for the quarter, outpacing last year’s figures. This growth was underpinned by positive developments across most of Pepsi’s segments, except one, showcasing the company’s agility in adapting to evolving market demands. 

Source: Trive Financial Services Malta – Pepsico Inc, Nkosilathi Dube 

Of particular note is the impressive surge in operating profit, leaping by an astonishing 76.17% in comparison to the second quarter of the previous year. This significant uptick signals a concerted effort by the company to enhance operational efficiencies, translating into enhanced profitability as well as strengthened investor confidence. Notably, Europe and Latin America emerged as standout regions with impressive year-over-year growth in operating profit: Europe surged by an impressive 52%, while Latin America recorded a solid 15% increase. However, the story wasn’t entirely uniform, as volume declines were observed in specific segments: Europe Beverages witnessed a 5% decrease, and Africa, Middle East, and South Asia Food experienced a 7% decline in volumes. 

Pepsico’s net income nearly doubled, bolstered by its avoidance of impairment of intangible assets that had previously weighed down earnings by $1.36 billion. This strategic manoeuvre saw the firm’s net income attributable to the second quarter climb to $2.75 billion, or $1.99 per share, an increase from $1.43 billion, or $1.03 per share, in the same period the previous year. 

Core gross margin expansion, which increased by 130 basis points in the quarter compared to 96 basis points a year ago and 50 basis points last quarter, showcased the company’s ability to extract efficiency gains from its operations. 

While Pepsi’s higher pricing strategy across various quarters dented volumes, its strategic approach yielded diverse outcomes. Volume, which doesn’t take into account pricing or exchange rate fluctuations, fell 3% for Pepsi’s food divisions and 1% for its beverage division. Notably, Quaker Foods North America and Pepsi’s North American beverage division faced volume declines of 5% and 3%, respectively, whereas Frito-Lay North America bucked the trend with a 1% volume gain. 

Looking ahead, Pepsi’s revised full-year projections underscore its positive earnings outlook. The company now anticipates a 10% organic revenue climb (up from 8% previously) and a 12% increase in core constant currency EPS (up from 9% previously), reflecting its confidence in its ability to capitalize on market opportunities and navigate potential headwinds. 

The company expects to return $7.7 billion in cash to shareholders in 2023 through dividends and share buybacks, which adds a layer of shareholder-friendly transparency, potentially enhancing investor sentiment. 

Source: Trive Financial Services Malta – Statista, Nkosilathi Dube 

Pepsico claims a substantial 25.60% global beverage market share, second only to The Coca-Cola Company (ISIN: US1912161007). Yet, due to its broad investments spanning both beverages and food, its market strength remains formidable, showcasing strategic diversification and resilience. 

Source: Trive Financial Services Malta – Koyfin, Nkosilathi Dube 

While Pepsico’s year-to-date performance lags behind the tech-driven NASDAQ100 due to the tech industry’s AI-driven surge, the consumer staples sector, including Pepsi, returns a modest 3.28%. Amidst this backdrop, Pepsi’s potential for a fifth consecutive year of gains stands as a testament to its steady market presence. 

Source: Trive Financial Services Malta – Koyfin, Nkosilathi Dube 

Pepsi’s profitability falls behind industry rivals, with an EBIT margin of 14.07% and a Net Income Margin of 8.76%, trailing the average and Coca-Cola. However, its entrenched global presence and strong brand recognition ensure stable margins and returns. This stability shields against volatile market shifts, underpinning its resilience and long-term value proposition. 

Source: Trive Financial Services Malta – Koyfin, Nkosilathi Dube 

Pepsi stands out with an exceptional 43.69% return on equity, surpassing even The Coca-Cola Company and achieving the highest levels among its competitors since 2017. This impressive return could beckon investors seeking superior industry returns despite relatively weaker margins. Pepsi’s ability to optimize its equity usage underscores its effectiveness in generating higher profits from shareholders’ investments. 

After discounting for future cash flows, a fair value of $196.80 per share was derived. 

Resumen 

In conclusion, Pepsico’s Q2 earnings present a compelling narrative of resilience and strategic agility amidst challenges. The company’s adept handling of declining demand, impressive earnings per share, and revenue growth highlight its ability to navigate a dynamic market landscape. The technical outlook underscores its upward trajectory and potential for a fifth year of gains. Fundamentally, Pepsico’s strong operating profit surge, even amid volume declines, showcases its operational efficiency. As Pepsico charts its course forward, its strategic diversification and steady market presence position it as a formidable player in the global market, offering stability and value to both investors and consumers. With a fair value estimate of $196.80 per share at hand, the stock can potentially meet the upside.  

Sources: Pepsico Inc, CNBC, Reuters, TradingView, Statista, Koyfin  

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