Pepsico Reports Earnings Beat, Maintains Conservative Guidance

Early Wednesday morning, Pepsico (PEP)  reported a top-and-bottom-line beat with its first-quarter results. Revenue of $12.05 billion came in slightly above consensus of $11.98 billion and EPS of $0.94 edged out consensus by roughly $0.03. While the stock is slightly lower in initial trading, we note that PEP had been trading roughly at all-time highs heading into the report. With the headline numbers steady, but margins and guidance slightly weak vs. consensus (more below), a slight pullback from the highs is not unexpected.

We remind subscribers that we had trimmed a portion of our PEP stake in recent months when the stock reached all-time highs, as we wanted to rationalize the size of our position, which had grown to over 4%.

We continue to like PEP as a way to diversify the portfolio away from a reliance on technology and cyclicals. We appreciate the steady dividend yield (roughly 2.8%) and the company's consistency in delivering the best organic growth in the large-cap space (vs. Coke  (KO) , whose organic growth was flat in the latest quarter. PEP trades at a discount to KO). That being said, we are currently holders of PEP, given the still-large weighting in the portfolio, but would be buyers on any prolonged pullback into the mid-to-lower $100s. Recall that much of the recent rally had been due to M&A speculation, adding to the incentive for short-term investors to take profits today.

Digging deeper into the results, the bottom-line beat was largely driven by a lower-than-expected tax rate, explaining why some investors may view the quarter as being of lesser quality. Organic growth was up 2.1% for the quarter, which is lower than the full-year outlook of a 3% rise (this was reaffirmed -- more below), but it was affected largely by the Easter holiday shift.

As we had noted following the fourth-quarter report, "Importantly, management mentioned on the conference call that core revenue growth and core EPS growth in the first quarter are expected to be below the full-year expectations. PEP highlighted tough comps in Frito-Lay and North American Beverages, as well as holiday calendar shifts (e.g. Easter into second quarter) that will impact results in North America."

This could provide some potential upside for the current quarter, especially given that management mentioned on the call that FX headwinds are expected to abate slightly -- to a -2% impact from initial expectations for a -3% headwind. In addition, as we have noted before, PEP management tends to be conservative in their expectations, preferring to under-promise and over-deliver, a setup that we like for our companies. CEO Indra Nooyi confirmed that the company is "on track to achieve [its] financial objectives for 2017."

On that note, PEP reaffirmed its full-year 2017 guidance for 3% core sales growth (with sequential improvement in the coming quarter) and EPS of $5.09, which slightly lags Street consensus of $5.14, as analysts tend to expect management to remain conservative. During the call, PEP explained that this outlook is "fueled by successful product innovation and strong marketplace execution, but tempered by a cautious macro-environment," again, leaving room for upside down the line.

By segment for this quarter, Frito-Lay North America reported roughly in-line results, despite the calendar shift and any impact from delayed tax refunds, which management highlighted during the conference call. FLNA delivered 2% organic sales growth that was hurt by a 1% volume decline, which is notable as this marked the first time in roughly five years where the segment suffered negative volumes.

On the call, management specifically addressed this issue, noting, "The two big factors regarding why volume was down in the quarter [are] both temporary... No. 1 was the New Year's build." The New Year fell into the 53rd week of 2016. "The second was some of the challenges that we had in the Sabra business due to some product challenges, which we're now through and have largely solved... Obviously, we will be out of the Easter, as well as the New Year's over last, and the volume will certainly come back because of that. Those were temporary factors."

Quaker Foods North America results were slightly weak vs. consensus: The unit reported a 3.5% organic decline, vs. consensus for roughly flat sales. On the call, Nooyi noted that this was primarily as a result of the calendar shift, and that business has already started to pick up since the end of the first quarter. North America Beverages delivered 1% organic sales growth, edging out consensus expectations of just a slight gain.

Across the globe, Latin America was again the strong segment, earning 6% organic sales growth due to continued high pricing. While pricing should be coming down in the following quarters (as inflation moderates), PEP has consistently seen volume growth in the region when pricing has abated, so the trend moving forward would mostly be for a better balance between the two.

Overall, we view the quarter as mostly in line, but likely not enough to encourage those looking to take profits to stay in the name at all-time highs, as the company is sticking to the under-promise, over-deliver playbook that has served it well in recent years. We are happy with execution, and while we understand that the sellers prefer to wait to see if PEP can deliver on its sequential improvement, we have no reason to believe that management will not beat its conservative guide by the end of the year.

At the time of publication, Action Alerts PLUS, which Cramer co-manages as a charitable trust, was long PEP.