Pepsi’s Snack Business Helps It Navigate Marketplace

With the second quarter widely expected to be the ugliest for most beverage companies, we think investors had relatively facile expectations heading into wide-moat PepsiCo's PEP earnings print and were primarily looking to gauge how the resilience of the snacking business (55% of sales) would offset weakness in soft drinks. The results were comforting in this regard (top- and bottom-line beats relative to CapIQ consensus), and management alluded to a sequential recovery from COVID-19 disruption during the third quarter. We plan to tweak our near-term estimates modestly, but our $140 fair value estimate will not change, and the shares look fully valued to us. Sentiment around wide-moat Coca-Cola’s stock has been less constructive due to its pure-play beverage exposure, but despite a more precarious near-term outlook, we still see a more compelling long-term risk/reward opportunity in Big Red’s shares.

Sales came in at $15.9 billion for the quarter, a 3% year-over-year decline. Organic revenue, however, was roughly flat, an impressive feat reflecting a booming snack business (up 5% globally with brands like Tostitos and Cheetos growing double-digits) juxtaposed against weak beverage performance (down 7%, with on-premises restrictions more than offsetting strong traditional retail sales). Headline Latin America revenue (a 17% decline) reflected currency headwinds and belied the region’s relatively healthy organic sales (which were flat). A predominantly snack food business, Pepsi’s Latin American operations are well suited for this environment due to less on-premises exposure and more containment-induced consumption occasions (whether for breakfast, snacking, dinner, or the like). Nevertheless, we’ll keep a close eye on how this business holds up, given the socioeconomic realities of the region (which have been exacerbated by COVID-19) and fundamentally different go-to-market dynamics.

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