Pepsi's Snack Business Fuels Growth

Wide-moat

While we expect that adjusting for the time value of money will add about a dollar to our fair value estimate, we reiterate our long-term outlook for the firm, which forecasts a five-year revenue CAGR of around 3%, and we think shares look fairly valued.

We were pleased to see continued strength in the food and snack business (which contributes slightly above 50% of revenue); this business posted 2% organic volume growth on a global scale, as well as improved pricing (increasing about 3% in North America), which we expect to continue as the company adds line extensions and more premium offerings to its vast portfolio.

At a consolidated level, Pepsi was able to achieve around 3% organic growth during the quarter, almost entirely attributable to price/mix, evidencing durable brand intangible assets that we think will help the firm maintain its leading position in this competitive landscape.

In North America, Frito-Lay remains a key driver of growth (with sales up 3%, thanks to favorable price/mix), which helped offset another quarter of softness in the Quaker Foods segment (with sales down 1%, though this decline is less pronounced than the 3% year-over-year decrease during the first quarter). While we expect this business to remain roughly flat over the near term, given challenging center-store dynamics, we appreciate Pepsi’s focus on more portable breakfast offerings and maintain that continued innovation in this space will be essential to restoring growth. Similarly, though organic beverage volumes fell about 2% globally, we suspect steady demand for higher-margin smaller packaging formats and continued innovation in the noncarbonated space should allow for further price/mix benefits in this category.

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