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| Markets • Stocks • Investing |
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PepsiCo Lost KFC to Coke. The Stock Is 19% Below Its High and Yields 4.3%. |
| PepsiCo beat third-quarter estimates on October 8 but cut its profit growth outlook because North America is lagging. KFC now plans to switch to Coca-Cola, while Taco Bell has renewed with Pepsi through 2036. |
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| Today’s Big Story |
PepsiCo’s North American Fix Is Taking Longer Than Expected, and Coke Keeps Pulling Ahead |
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Key Points
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Third-quarter adjusted earnings of $2.34 per share beat estimates, but PepsiCo cut its full-year core profit growth outlook to 2.5% to 3.5%. |
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North American beverage volume fell 2% and food volume was flat, while international markets supplied 41% of revenue so far this year. |
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The stock closed near $139 on October 23, about 19% below its 52-week high, with a 4.3% dividend yield, so consider whether the turnaround is priced in. |
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| PepsiCo beat on the headline numbers and still disappointed. Third-quarter adjusted earnings were $2.34 per share, against $2.29 expected. |
| Revenue rose 5.6% to $25.27 billion, ahead of the $24.96 billion forecast. Organic revenue, which strips out currency and deals, grew 3.1%. |
| Then came the guidance. PepsiCo now expects core earnings per share to grow 2.5% to 3.5%, down from the low end of a prior 5% to 7% range. |
| The cause is home. CEO Ramon Laguarta said North America “performed below our expectations,” and the CFO said the turnaround is moving more slowly than planned. |
| North American beverage volume fell 2% in the quarter. North American food volume was flat. |
| International is the bright spot. It has produced 41% of net revenue this year, and volume grew in all but one international unit. |
| The snack fix is partly working. PepsiCo cut snack prices by as much as 15% in February, and Laguarta says volume has moved from low single-digit declines to modest growth. |
| Soda is the bigger problem. Fortune reports Pepsi-Cola held 8.1% of the US soft drink market last year, against 18.5% for Coke. |
| Laguarta was blunt. “We do not feel good about the beverage business,” he told analysts, and he promised more urgency on soft drinks. |
| Last week brought a symbolic loss. KFC said it will replace Pepsi with Coca-Cola products at its 3,700 US restaurants in January. |
| KFC was spun out of PepsiCo in 1997, and the two had partnered for about 40 years. The sales at stake are small, but the signal is not. |
| Pepsi did get a win on October 22. Taco Bell renewed its beverage deal through 2036, and PepsiCo shares rose about 2.5% that day. |
| Management also warned of “a new wave of inflation” from higher energy prices. It plans price increases with guardrails, plus cost cuts to fund marketing. |
| The shares closed at $138.83 on October 23, against a 52-week range of $123.47 to $171.48. The forward dividend of $5.92 works out to about 4.3%. |
| PepsiCo trades at roughly 17 times trailing earnings, well below Coca-Cola’s near-28 multiple. It generates about twice Coke’s revenue but carries about half its market value. |
| The bottom line. PepsiCo is a cheaper, higher-yielding stock with a visible problem in North American beverages. Watch whether volume turns positive there before treating the discount as an opportunity. |
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