PepsiCo, Inc. :PEP-US: Earnings Analysis: Q3, 2016 By the Numbers : September 30, 2016

PepsiCo, Inc. reports financial results for the quarter ended August 31, 2016.

Highlights

  • Summary numbers: Revenues of USD 16027 million, Net Earnings of USD 1992 million.
  • Gross margins narrowed from 54.62% to 54.55% compared to the same period last year, operating (EBITDA) margins now 17.60% from 21.96%.
  • Change in operating cash flow of -8.47% compared to same period last year is about the same as change in earnings, likely no significant movement in accruals or reserves.
  • Earnings growth due to contribution of one-time items.

The table below shows the preliminary results and recent trends for key metrics such as revenues and net income growth:

2015-08-31 2015-12-31 2016-03-31 2016-06-30 2016-08-31
Relevant Numbers (Quarterly)
Revenues (mil) 16331 18584 11862 15396 16027
Revenue Growth (%YOY) -5.15 -6.84 -2.91 -3.3 -1.86
Earnings (mil) 533 1718 931 2005 1992
Earnings Growth (%YOY) -73.42 31.35 -23.69 1.26 273.73
Net Margin (%) 3.26 9.24 7.85 13.02 12.43
EPS 0.36 1.17 0.64 1.38 1.37
Return on Equity (%) 14.14 53.61 31.98 67.91 63.51
Return on Assets (%) 3 9.85 5.33 11.24 10.87

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Market Share Versus Profits

Revenues History
Earnings History

Compared to the same period last year, PEP-US‘s change in revenue was close to the amount of its change in earnings. It remains to be seen how the rest of its peer group’s results will turn out and if PEP-US‘s performance is a sign of any major shift in the composition of market share in this sector. Also, for comparison purposes, revenues changed by 4.10% and earnings by -0.65% compared to the previous period.

Earnings Growth Analysis

The company’s earnings rose year-on-year. But this growth has not come as a result of improvement in gross margins or any cost control activities in its operations. Gross margins went from 54.55% to 54.62% for the same period last year, while operating margins (EBITDA margins) went from 17.60% to 21.96% over the same time frame.

Gross Margin Trend

Companies sometimes sacrifice improvements in revenues and margins in order to extend friendlier terms to customers and vendors. Capital Cube probes for such activity by comparing the changes in gross margins with any changes in working capital. If the gross margins improved without a worsening of working capital, it is possible that the company’s performance is a result of truly delivering in the marketplace and not simply an accounting prop-up using the balance sheet.

Gross Margin History
Working Capital Days History

PEP-US‘s decline in gross margins has not produced any significant offsetting improvement in its working capital . This leads Capital Cube to conclude that the decline in gross margins are likely from operating issues and not trade-offs with the balance sheet. Working capital days are currently 39.54 days, compared to last year’s level of 14.67 days.

Cash Versus Earnings – Sustainable Performance?

PEP-US‘s year-on-year change in operating cash flow of -8.47% is around its change in earnings. This suggests that there are likely no significant movement in accruals or reserves for managing earnings this period.

Margins

The company’s operating (EBIT) margins contracted from 18.48% to 17.60%. In spite of this, the company’s earnings rose. This was influenced primarily by one-time items, which improved pretax margins from 7.31% to 16.25%.

EBIT Margin History
PreTax Margin History

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Company Profile

PepsiCo, Inc. engages in the manufacture, marketing, distribution, and sale of beverages, foods, and snacks. It operates through the following segments: Frito-Lay North America; Quaker Foods North America; North America Beverages; Latin America; Europe Sub-Saharan Africa; and Asia, Middle East, and North Africa. The Frito-Lay North America segment markets, distributes, and sells snack foods under the Lay’s, Doritos, Cheetos, Tostitos, Fritos, Ruffles, and Santitas brands. The Quaker Foods North America segment includes cereals, rice, and pasta under the Quaker, Aunt Jemima, Quaker Chewy, Cap’n Crunch, Life, and Rice-A-Roni brands. The North America Beverages segment consists of beverage concentrates, fountain syrups, and finished goods under various beverage brands such as Pepsi, Gatorade, Mountain Dew, Diet Pepsi, Aquafina, Diet Mountain Dew, Tropicana Pure Premium, Sierra Mist, and Mug. The Latin America segment covers beverage, food, and snack businesses in Latin America region. The Europe Sub-Saharan Africa segment comprises of beverage, food, and snack goods in Europe and Sub-Saharan Africa regions. The Asia, Middle East, and North Africa segment offers snack food products under the Lay’s, Kurkure, Chipsy, Doritos, Cheetos, and Crunchy brands. The company was founded by Donald M. Kendall, Sr. in 1965 and is headquartered in Harrison, NY.

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