PepsiCo’s (NYSE:PEP) net earnings rose by 19% in Q4 2012, giving investors a big reason to cheer after what has largely been a lackluster year for the company. The quarter’s lift in income was provided primarily by significantly lower tax expenses compared to Q4 2012 coupled with high organic growth generated from rising volume sales in emerging markets. The company’s snacks division remained the primary growth driver for the top-line, offsetting a marginal decline in beverage volumes in the company’s domestic market, North America.
2012 was a transitional period for PepsiCo with the company trying to turn itself around through various restructuring programs and renewed marketing vigor. Operational reshuffling such as PepsiCo’s divestment of its Mexican bottling operations took a toll on the company’s 12-month top-line, which declined to $65.5 billion, 1.5% lower than the previous year’s. Meanwhile, the company’s aggressive marketing strategy set it back by as much as $600 billion over the year, increasing pressure on the bottom line. PepsiCo’s operating margin stood at 13.9% in 2012 compared to 14.5% a year ago.
The last quarter, however, should help investors overcome some anxieties surrounding PepsiCo’s internal restructuring. Although the slide in top line continued with revenues dropping by around 1%, the decline was less marked than in previous quarters. Like in previous quarters, the decline can be attributed to the continued effects of structural divestments made in previous quarters. In fact, on an organic basis, the company’s revenues grew by a strong 5% over the quarter. Emerging markets once again highlighted the growth, posting 9% growth in organic revenues.
Snacks Leads The Way Again
Looking at PepsiCo’s product segments, the company’s snacks business has been its star performer over the past few years. Meanwhile, the beverages business has seen a significant slowdown in sales, particularly in developed markets. The trend continued in the fourth quarter with snacks sales in North America rising by 5% on an organic basis driven entirely by volume. In Latin America, the company’s snacks sales grew by a whopping 13%, although this was driven largely by pricing increases which contributed 10% of 13% growth. The company’s breakfast food products, sold under the Quaker brand also saw organic revenues rise by 2.5% enforced largely by pricing.
Beverages Also Grow, But Dragged Down By CSDs
Meanwhile, the company’s beverage segment also reported organic growth, albeit at lower levels. North American beverage sales, for example, grew by only 2.5% on an organic basis. The growth was entirely driven by the non-carbonated segment which reported both higher volumes and stronger pricing. Carbonated sodas, meanwhile, saw volumes shrink by 1%. We expect the company to see flagging sales in the CSD segment as consumers move away from sodas in developed economies. That means PepsiCo will have to increase its focus on products like juices (Tropicana) and energy drinks (Gatorade) in order to see any significant traction in beverage sales at least in developed markets.
Investors should also be pleased with the fact that despite the year’s general slump in sales and increasing pressure on the bottom line, PepsiCo remains committed towards its new and aggressive marketing strategy. The company’s ad spend in the last quarter rose by around 50 basis points over the previous year, reaching 5.7% of net revenues.
We have a price estimate of $78 for PepsiCo, which we will revise based on the latest results.