Newly named CEO Ramon Laguarta looks capable of taking PepsiCo (PEP) stock in the right direction.
After coming in-line with estimates for its fourth quarter earnings results on Friday, and touting a reinvestment plan, the market seems pleased with Laguarta after his first earnings call in succession of long-time CEO Indra Nooyi.
Pepsi said core earnings for the three months ending in December came in at $1.49 per share, rising 13.7% from the same period last year, and matching the Street consensus forecast. Group revenues were also in-line with estimates, but were essentially flat from the prior year period at $19.524 billion. Pepsi also said it would boost its annual dividend by 3% to $3.82 per share.
Looking at 2019, Pepsi said core earnings would decline by 1%, thanks in part to "incremental investments that are intended to further strengthen the business", but Laguarta noted the company should return to a "high-single-digit core constant currency EPS growth" in 2020, powered by these investments.
Analysts were positive on his ability to set an achievable base line for growth in the earnings call, while continuing investment in necessary targets.
"We expect a positive reaction to strong quality Q4 results and a FY19 earnings rebase under a new CEO," Morgan Stanley analyst Dara Mohsenian said on Friday. "2019 EPS guidance looks clearly achievable while also including reinvestment under a new CEO to drive forward topline growth, and we believe investors will (and should) buy into a derisked story."
The guidance, while conservative, has been keyed in on by more than just one analyst.
"While the Street estimates will need to move lower after this guidance, we believe the long waited re-base of expectations eliminates a significant overhang and de-risks the outlook going forward," JP Morgan analyst Andrea Teixera explained.
The dividend increase only further invites investors to the safer stock story under Laguarta's "reset".
Both analysts issued "Buy" ratings on the shares based on the apparently positive results.
The confidence in Laguarta is a quick change from potential breakup rumors that echoed among shareholders only months ago.
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, mused about a breakup upon his announcement.
"I think Pepsi is worth a lot more than what it's trading at," he said at the time. "There is way too much overhead and bureaucracy."
He noted that Trian Fund Management's Nelson Peltz has targeted Pepsi in the past and speculated they could again become a target.
While Peltz's firm seemingly made peace with Nooyi, the near term of the CEO transition could be an opportune time to reenter for his firm.
"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."
It would appear that Laguarta has put these ideas to bed with a strong start and a plan to deal with the bureaucracy and market share issues.
"[Pepsi's priorities are in] becoming more capable, linear, more agile, and less bureaucratic," Laguarta said. "In doing so, we will drive down cost and that enables us to plow the savings back into the business, to develop scale and sharpen core capabilities that drive even greater efficiency and effectiveness, creating a virtuous cycle."
Overall he touted a strong company that can provide more transparency and continue investment in new enterprises, like the recent acquisition of SodaStream to tap into the growing market for seltzer and sparkling water.
"We're going to invest sustainably and rationally and we'll keep building a very strong company that I'm convinced will do great for us in the near future," Laguarta concluded.
The market seems to have picked up on this positivism as the stock has risen strongly in Friday's trading.
Whether there might be a better entry point for the stock always remains a question on a day like today, however.
For Stephen "Sarge" Guilfoyle's thoughts on when to buy, click here.
