Friday, February 14, 2020

Frito-Lay Spices Up PepsiCo, But Concerns Remain

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What’s happening: PepsiCo reported better-than-expected results for its fourth quarter but issued disappointing guidance for 2020.

What happened: The beverage and snack giant’s quarterly results were driven by strong performances of its Frito-Lay and North American beverage divisions. Shares of PepsiCo rose less than 1% despite its fourth-quarter beat, as investors focused more on the company’s weak outlook.

  • PepsiCo reported adjusted earnings of $1.45 per share, just ahead of the consensus estimate of $1.44 per share.
  • Sales grew 5.7% to $20.64 billion, exceeding expectations of $20.27 billion.
  • The company posted a sharp decline of 74.15% in net income to $1.77 billion, as the previous figures were elevated by a huge tax boost.
  • Profits at the North American beverage division rose 5% to $460 million, while Frito-Lay North America posted 3.1% growth in earnings to $1.56 billion.

Why it matters: PepsiCo topped expectations, lifted its dividend by 7% to $4.09 per share and announced a $2 billion share buyback program. However, these announcements failed to impress investors who chose to focus on the company’s bleak outlook.

Although the North American beverage unit contributed to sales growth, its performance was eroded by rising marketing and raw material costs. The Quaker Foods North America unit failed to achieve growth.

PepsiCo’s performance outside the US was strong, with growth in Asia Pacific, China and Australia & New Zealand regions. Europe, Africa, the Middle East and South Asia also contributed to the four-quarter results.

For 2020, the company projected merely 4% organic revenue growth and 7% earnings per share growth. Adjusted earnings of $5.88 per share came in below the average analyst forecast of $5.95. PepsiCo cited foreign currency fluctuations as an expected headwind for 2020, which did not convince investors.

Much of the stellar sales growth was driven by PepsiCo’s global ad spend in the fourth quarter, which was up over 12%. However, the company intends to reduce this spend, while reconsidering how to market its classic brands to consumers. The snack and beverage behemoth needs to evaluate its positioning amid a stark trend of growing health consciousness globally.

PepsiCo has recently been focusing on its snacks business amid a steep decline in the consumption of soft drinks. The company looks to Frito-Lay and Doritos to ease the impact of this downtrend.

Moreover, the company has temporarily closed all its plants in China following the coronavirus outbreak.

Despite these obstacles, several analysts pointed out that PepsiCo typically begins the year with a conservative forecast, giving itself room for some misses and setting itself up for some raises later in the year.

What to watch: With China representing around 2% of PepsiCo’s business, any news of operations reopening would be positive for investor sentiment. The company’s archrival Coca-Cola has recently announced plans to launch its sparkling water range. Investors will keep a close eye on further news from Coca-Cola as well as on PepsiCo’s plans for 2020, which includes the launch of Pepsi Café, Zero Sugar version of Mountain Dew and Bubly sparkling water.

 

The Markets Today

     

The US dollar will be the currency to watch today, as investors await a bunch of economic releases from the country.

Context: The US dollar climbed to new 2020 highs versus the euro in the previous trading session, with investors moving back to “safe-haven” assets amid fresh concerns over the coronavirus outbreak.

Details: The greenback remained solid against most of its major rivals on Thursday, after China reported an unexpected rise in the number of coronavirus cases due to a change in the methodology for counting cases. There was an addition of around 15,000 new cases on Wednesday. The euro slipped to a new 2020 low of around $1.0842 versus the greenback with no relief visible for the decline.

The Australian dollar slipped to $0.6724 versus the greenback on Thursday. The US dollar climbed to 0.9792 Swiss francs and rose to 1.3260 Canadian dollars. The traditional safe-haven Japanese yen moved higher, with the US dollar buying 109.82 Japanese yen, down from 110.08 in the prior session. The British pound also rose to $1.3053 versus the US dollar following a cabinet shuffle by UK Prime Minister Boris Johnson.

Why it matters: Following the US dollar’s recent strong performance against all major peers, investors are now focusing on economic reports, including retail sales, industrial production, import prices, business inventories and consumer sentiment index, scheduled for release today. Since the US markets also closed lower in the prior session, the latest economic numbers will determine today’s performance. Investors will also be keeping an eye on data from the Eurozone today.

What to watch: US retail sales are expected to show a sequential rise of 0.3%. Import prices, which rose 0.3% in December, are projected to be down 0.2% in January. Growth in business inventories is expected to rebound to 0.1% in December, after having declined 0.2% in November.

Other Markets: European indices are trading mixed on Friday, with the FTSE 100, DAX 30 and CAC40 down 0.2%, 0.1%, and 0.2%, respectively. The IBEX 35 and STOXX 600 are trading up 0.3% and 0.1%, respectively.

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What else to watch today

     

India’s balance of trade, Canada’s new motor vehicle sales and Baker Hughes North American rig count report.