Pepsi Keeps Up Impressive Streak

With headline performance in 2020 that belied the disruption across the broader economy, investors were seemingly less enamored with wide-moat PepsiCo’s PEP value proposition heading into its first-quarter earnings print (as shares have been under pressure in recent months). Still, the firm continued its streak of impressive performance (with top- and bottom-line results ahead of FactSet consensus), dispelling--at least for now--the notion that its growth will be challenged in 2021. To be sure, comps will be toughest in the quarters ahead, but we expect the diversification in the business to allow the firm to maintain its growth algorithm irrespective of how consumer behavior evolves throughout the year. We don’t plan to materially change our $145 fair value estimate outside of time value adjustments, and while current trading levels no longer present a compelling margin of safety, we’d be happy buyers on any further pullbacks.

Revenue of $14.8 billion represented a 6.8% year-over-year increase. Though 5 points of this bump was due to recent strategic acquisitions (chiefly Be & Cheery in China, Pioneer in Africa, and Rockstar in the U.S.), over 2% organic growth is still commendable given tough comps faced from March 2020 pantry loading. In snack foods, Frito Lay remained vibrant, and Quaker brands in the U.S. continued to benefit from elevated at-home occasions (specifically around breakfast and side dishes). Beverages had several bright spots, with the North America business up 1.5% organically. Energy remains a key strategic focus in this unit, revolving around Rockstar and Mountain Dew (with its Bang partnership likely sitting ignominiously on the sidelines). The firm signed NBA superstar LeBron James as the marquee ambassador for its new Mountain Dew energy drink (Rise); this is no small feat, and likely required a nontrivial financial commitment, but signals to us management’s determination to compete more aggressively in this high growth, high margin category.

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