Perhaps earnings season kicks off with the banks later this week. Perhaps, in an officially unofficial way, it just did. Sarge fave PepsiCo (PEP) batted lead-off for the season on Tuesday morning.
For the second quarter, the global purveyor of soda pop and salty snacks posted adjusted EPS of $1.86 (GAAP EPS: $1.03) on revenue of $20.225B. Both of these top and bottom line results did beat Wall Street's expectations while the sales print was good enough for year over year growth of 5.3%.
Currency exchange rates placed a 3% negative impact on net revenue, and a 2% negative revenue upon earnings per share.
Unit Performance
PepsiCo beverages North America experienced a 0.01% sales decline to $6.12B, producing operating profit of $651M (-19.5%).
Frito-Lay North America experienced 13.8% sales growth to $5.181B, producing operating profit of $1.382B (+4.8%).
Europe experienced an 8% sales decline to $3.023B, producing operating profit/loss of $-797M, down from $405M for the one year ago period.
Latin America experienced 22.8% sales growth to $2.415B, producing operating profit of $420M (+18%).
Africa, Middle East, and South Asia experienced 5.9% sales growth to $1.696B, producing operating profit of $290M (+13.3%).
Asia Pacific, Australia and New Zealand and China Region experienced 3.3% sales growth to $1.115B, producing operating profit of $206M (+7.3%).
Quaker Foods North America experienced 17.4% sales growth to $675M, producing operating profit of $135M (+5.5%).
Outlook
PepsiCo now expects to deliver 10% organic revenue growth for fiscal year 2022, versus prior guidance for 8% growth. Consistent with prior guidance, PepsiCo continues to expect to see 8% growth in core constant currency EPS, a core effective tax rate of 20%, and total cash returns to shareholders of approximately $7.7B, comprised of $6.2B in dividend payments and $1.5B in share repurchases.
The CEO
Chairman and CEO Ramon Laguarta in the press release stated, "We are pleased with our results for the second quarter as our business momentum continued despite ongoing macroeconomic and geopolitical volatility and higher levels of inflation across our markets."
Balance Sheet
At the conclusion of the period ending June 11th, PepsiCo had a net cash position of $5.692B,and current assets of $22.633B (up almost $1B over six months). This includes $5.287B in inventories, both raw and finished. Current liabilities totaled $27.223B (also up $1B over six months) including $6.032B in short-term debt obligations.
This leaves the firm with a current ratio of 0.83. If you know me, you know that I can not like that. Though with a business like this, a low quick ratio can sometimes be forgiven. That said, the inventory number is elevated even for PepsiCo. Sans these inventories, PepsiCo's quick ratio drops to 0.64.
Total assets amount to $93.103B, including $34.29B in "goodwill" and other intangibles. That's 36.8% of total assets, which makes me a little uncomfortable despite the fact that PepsiCo and all of PepsiCo's brands certainly would have substantial intangible value. Total liabilities less equity comes to $74.429B, including $33.247B in long-term debt obligations.
Clearly, this balance sheet is a problem. Not only is the debt-load way too high in my opinion, the firm's cash balance does not even cover the short-term debt. Don't get me wrong... PepsiCo is not going anywhere, and as we have stated, there certainly is value in the firm's intangibles, but working on this balance sheet has to be prioritized.
My Thoughts
PEP has remained range bound all year. The stock still stands above all three of its key moving averages (21 day EMA, 50 day SMA, 200 day SMA), while seriously outperforming the S&P 500 this year. Readers know that I am long PEP, the name has long been one of my fallback Staples during times where I think I have to defend my portfolios.
At this time, PEP is part of my "Pitchfork" portfolio that includes a handful of Staples for their dividend yields and lower betas, a handful of elite semiconductor names for their perceived indispensability for all things related to economic recovery, and a handful of defense contractors because warfare is expensive and so is being prepared for one.
Pretty much NATO in its entirety as well as NATO's Asian allies have had to learn a hard lesson concerning the even greater costs associated with being underprepared this year.
Now, here's my problem. I had always fallen back on PepsiCo because people like soda and eat crappy but cheap food when they feel poor. Salty snacks are perfect for that. However, the firm has still failed to show significant improvement on that balance sheet, and yes that does bother me. Especially as the firm promised to repurchase shares. I don't know, maybe pay down some debt instead.
For that reason, I will be using this morning's strength as an opportunity to start swapping PEP out of this portfolio while replacing it with Coca Cola (KO) . Coke may not sell salty snacks, but Coke does pay shareholders a slightly higher dividend yield (2.73% to 2.57%). In addition, the stock KO has outperformed PEP this year, and best of all, Coke has a stronger balance sheet than does Pepsi. For me, in 2022, that matters.
(PepsiCo is a holding in the Action Alerts PLUS member club. Want to be alerted before AAP buys or sells PEP? Learn more now.)
