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>>> PepsiCo Just Beat the Street, but Does That Make It a Buy?


Motley Fool

By David Moadel

Jul 15, 2022


https://www.fool.com/investing/2022/07/15/pepsico-just-beat-the-street-but-does-that/?source=eptyholnk0000202&utm_source=yahoo-host&utm_medium=feed&utm_campaign=article


KEY POINTS

Despite the market's ho-hum response, PepsiCo quarterly results beat forecasts.

PepsiCo is passing surging input costs on to its consumers via higher prices.

Only time will tell how much price inflation Americans will put up with this year.


Even as PepsiCo touts its categories' resilience, the real headline is customers' tolerance for price increases.
The headlines have wailed about rising inflation in fuel and housing prices, but what about snack foods and soda? Like practically every other consumer goods business in America, PepsiCo (PEP 0.65%) has had its fair share of woes in 2022 due to rising costs for basic materials.

PepsiCo won't win any popularity contests for passing those higher commodity costs on to the consumer. The company's investors, on the other hand, may understand its move to hike product prices, and this strategy may have saved PepsiCo from a potentially disappointing second quarter.

Indeed, even if investors weren't necessarily exuberant about PepsiCo beating Wall Street's quarterly expectations, it's notable that the company is making headway in softening the blow of inflation. As the business signals further product price hikes, investors will likely be looking to see if PepsiCo can continue to demonstrate impressive top-line growth.

Delicious data points

Whether it was Frito-Lay chips or good old Pepsi Cola, PepsiCo evidently remained a junk-food dynamo throughout 2022's second quarter irrespective of surging inflation. Perhaps this isn't a surprise as these aren't exactly high-ticket items, but one would still expect inflation to have taken a bite out of the company's top and bottom lines.

In what may be construed as a testament to Americans' willingness to cough up for sugary and salty treats, however, PepsiCo seemingly beat the odds and posted revenue and profit growth. Specifically, PepsiCo's Q2 2022 core non-GAAP earnings per share (EPS) of $1.86 represented a year-over-year 8.1% increase and beat Wall Street's consensus estimate of $1.74. The company's quarterly revenue of $20.23 million, moreover, rose 5.2% and beat analysts' $19.51 billion estimate.

Perhaps most encouraging of all was PepsiCo's 13% jump in quarterly organic sales. Looking ahead, the snack specialist remains optimistic as it raised its full-year organic revenue growth guidance from 8% to 10% while maintaining an 8% growth forecast for the company's full-year core constant currency EPS.

The rising cost of snacking

Chairman and CEO Ramon Laguarta credited PepsiCo's "highly dedicated employees" while also citing the "strength and resilience" of its product categories for the aforementioned quarterly results. But there was also another contributing factor -- PepsiCo raised its product prices a whopping 12% in Q2. This was in response to inflation that was "well into the teens," according to CFO Hugh Johnston.

He also noted, "So far for us, there hasn't been much reaction from the consumer" to the product price hikes. In fact, he said that PepsiCo's sales volumes increased 3% to 6% globally.

Interestingly, investors didn't seem particularly impressed with PepsiCo's quarterly performance as the share price was essentially flat on earnings day. Perhaps they're waiting to see just how much longer customers will put up with substantially higher food and beverage prices before they reduce their snack-food intake.

It seems probable that PepsiCo will continue down this path as Johnston has indicated that higher consumer prices are likely this year, saying that further price-raising actions (along with cost-cutting measures) may be needed.

Thus, Laguarta really wasn't kidding when he said, "Nobody's isolated from inflationary pressures." Both PepsiCo and its customers are aware of this pressure, but it's mainly the customers who are actually feeling it. So if PepsiCo's investors are skeptical despite the company's outstanding fiscal results, it's understandable as they can only wonder how much longer snackers can stomach high prices.

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