PepsiCo Experiencing Subdued Growth, Business Disruptions Due to Geopolitical Tensions

Image: PepsiCo has traded sideways for most of the past couple years.

By Brian Nelson, CFA

On October 8, PepsiCo (PEP) reported mixed third-quarter results with revenue coming up a bit short of consensus and non-GAAP earnings per share beating the Street’s forecast. The headline numbers weren’t great with net revenue falling 0.6% and earnings per share falling 5%. Organic revenue growth was 1.3% in the third quarter (consensus was for 3% growth), with core earnings per share coming in at $2.31, with core constant currency operating profit up 6% and core constant currency earnings per share up 5%.

On an organic revenue basis, Frito-Lay North America experienced a 1% decline, while Quaker Foods North America fell 13%. PepsiCo Beverages North America increased 1%, and Latin America (+3%), Europe (+6%), and Africa, Middle East and South Asia (+6%) experienced strength. Its Asia Pacific, Australia and New Zealand and China region experienced a 1% decline in organic revenue in the period. Volume for both its Convenient Foods and Beverages divisions fell 2% in the quarter.

On a core constant currency percentage change basis for operating profit, Frito-Lay North America experienced a 9% decline, while Quaker Foods North America fell 28%. PepsiCo Beverages North America saw 7% growth, while Latin America (+9%) and Europe (+11%) showed strength. Africa, Middle East and South Asia fell 9%, while its Asia Pacific, Australia and New Zealand and China Region showcased 11% growth. Total core constant currency operating profit advanced 6% in the quarter.

Management talked about subdued category performance trends in North America and a weaker than expected outlook in the press release:

Our businesses remained resilient in the third quarter, despite subdued category performance trends in North America, the continued impacts related to certain recalls at Quaker Foods North America and business disruptions due to rising geopolitical tensions in certain international markets. Strong cost controls aided our profitability, as we made incremental investments to improve our marketplace competitiveness.

For the balance of the year, we will continue to invest in commercial activities and brand support to stimulate consumer demand. Our investments will be enabled by elevating and advancing productivity initiatives across our entire organization. Given our performance to date and our outlook for the fourth quarter, we now expect to deliver a low-single-digit increase in organic revenue (previously approximately 4 percent organic revenue growth). We continue to expect to deliver at least 8 percent core constant currency EPS growth as we will focus on tightly managing our costs to better align with the subdued growth environment that we are currently operating in. 

As management noted, for 2024, PepsiCo expects a low-single-digit increase in organic revenue (was previously approximately 4% in organic revenue growth) and at least an 8% increase in core constant currency earnings per share. PepsiCo is targeting total cash returns to shareholders of $8.2 billion for the year, comprising $7.2 billion in dividends and the balance in share repurchases. As it relates to core earnings per share, management is targeting at least $8.15, a 7% increase compared to 2023 core earnings per share of $7.62. Though PepsiCo’s results weren’t great with subdued category trends in North America and business disruptions from geopolitical tensions, we still like shares as a key diversifier in the portfolio of the Best Ideas Newsletter.  

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