Pepsi's Softer Beverage Volume No Cause for Concern

Although the company trimmed its outlook for organic growth this year to below 3% (its original expectation), our view of its long-term trajectory is unchanged. We think Pepsi will be able to leverage line extensions and product innovation in its portfolio of leading brands to revitalize sales over the next several years. We forecast five-year compound annual revenue growth above 3%, with price/mix contributing above two thirds of this growth. Operating margin for the quarter stood above 18%, indicating 80 basis points of expansion year over year, and we reiterate our outlook for operating margin averaging above 17% over the next several years (which implies mid-single-digit operating income growth) as further savings from the company's productivity efforts, which target $1 billion in annual savings through 2019, materialize.

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