PepsiCo, Inc. (PEP) shares closed the day down 1.8% to $108.72 per share as the company's CEO of 12 years, Indra Nooyi, made her exit.
The company's reports of negative impacts from foreign exchange rate impacts, margin squeezes, and a denial of cannabis opportunity all helped hamper the stock today as management turned over.
All of these factors came to outweigh the earnings numbers for the company's third quarter, which recorded a beat on top and bottom line estimates.
Reported operating margin for the company contracted 75 basis points and core operating margin contracted 25 basis points in the third quarter, according to the company's 8-K filing.
The company cited costs in transport, aluminum, and increased advertising spend for this impact.
"Number one was cost pressure, transport costs add little more up," Pepsi CFO Hugh Johnston explained. "Number two, it was the increased in advertising and marketing spend across a number of our businesses."
He said the company has recently priced this is and will look to overcome these concerns as new CEO Ramon Laguarta takes the helm.
"Regarding the input cost inflation, whether it's transport or whether it's aluminum, our history is always been to price through inflation in our developed markets," he explained. "I think you will see the profit picture improve in Q4 as a result of that pricing."
PepsiCo then looked to squeeze moving forward, as it revised expectation of an approximate 1 percentage point headwind from foreign exchange rates, given the strengthening dollar.
Deutsche Bank AG (DB) analyst Steve Powers noted the succession plan as a driver of a down day for Pepsi in his note this morning.
"Given the middling results today, the possibility of an earnings rebase for 2019, and a new, relatively unknown CEO taking the reins tomorrow, we expect the stock to modestly underperform today," he wrote.
To be sure, the transition could be an opportunity for shareholders to cash in.
Patrick A. Terrion, principal of Founders Capital Management, a Hartford-based advisory firm that oversees 10,525 shares of PepsiCo in its $219.3 million portfolio said that bureaucracy remains an issue at Pepsi, but the transition could help lead to a solution.
"I think Pepsi is worth a lot more than what it's trading at," he said. "There is way too much overhead and bureaucracy."
He noted that PepsiCo Trian Fund Management's Nelson Peltz has targeted Pepsi in the past.
"If I were [Nelson Peltz] I would wait about six months into the CEO transition and then I'd make a push," Terrion said. "As a shareholder, absolutely I'd support a call for a breakup."
Terrion more aggressively suggested that the company be broken into two companies: snacks and beverages.
"It needs to be broken up into two companies," he explained. "There has been a lot of value destruction under Nooyi in moving investment from high margin products to lower margin products. I understand the push to 'good for you,' but Russian yogurt?"
To be sure, given Nooyi's performance against her peers, Terrion's point on value creation could end up being a bullish case for incoming CEO Ramon Laguarta should he shake things up and focus on the necessary segments.
No Green Lands You in the Red
Another issue for the company was its denial of plans to enter the cannabis and CBD space.
During this morning's earnings presentation company CFO Hugh Johnston was confronted with the cannabis question, as analysts looked to assess whether the company might compete with rival Coca Cola Co. (KO) in the space.
"I think it's fair to say we look at everything, but I think that the difficulties in investing in that category particularly in the U.S. where federally these things are still not legal is quite a considerable challenge," he responded. "We look at everything but certainly no plans at this point to do anything."
When prodded by Jim Cramer about "edibles or liquids" on the cannabis foray, Johnson declined to elaborate.
The denial was a startling answer for experts and shareholders, who feel the company will have no choice but to enter the burgeoning cannabis trade soon enough.
J. Smoke Wallin, president of Vertical Cos., which helps cannabis companies with compliance, cultivation and retail strategies told Real Money of his disbelief at the reaction from Pepsi.
"I was really surprised at the way [Johnston] answered that question," Wallin said. "It would shock me if they aren't looking into [cannabis] at all. How could they not be?"
He added that given Coke's confirmed interest in cannabis and cannabidiol, Pepsi eschewing the opportunity available would put the company at a severe disadvantage.
"The reality is that they are not going to have a choice," he explained. "They're going to have to look into cannabis, either as a leader or a follower."
His comments echo some of the company's shareholders.
Patrick A. Terrion, principal of Founders Capital Management, a Hartford-based advisory firm that oversees 10,525 shares of PepsiCo said the move will come in time.
"There's no question Pepsi will be experimenting with cannabis, just like everyone else," he said. "It's going to happen."