Pepsi faces risks that consumers spurn its fare in favour of healthier options

Business Strategy and Outlook

Pepsi’s strategy is seen, emphasizing growth in its core snacks (number one position) and beverages (number two position) businesses through expanding its addressable market and investing to align its mix with evolving consumer preferences (such as snacking as a meal substitute), favourably. Within snacks (55% of sales), Pepsi dominates the global competitive landscape (7 times its closest competitor, with five of the six top brands), and it is alleged its core brand development advantages–direct-to-store partnerships with retailers, innovation to align with consumer preferences, and data analysis–allow it to drive growth in its underlying categories. In experts view, Pepsi’s market position enables it to raise price without a lasting hit to volumes (and should continue to do so), given its troves of global consumer data. But the firm doesn’t just let its fare fend for itself. Rather, it spends to support its brands in a crowded space. In addition, investments to bolster its manufacturing capacity should further entrench its standing with leading retail partners in both physical and digital outlets, in experts opinion.

In its beverage business (45% of sales), Pepsi is a strong number two player in an oligopolistic industry, and it is anticipated the firm can generate growth within the carbonated soft drink, or CSD, category and still beverages, such as sports (where it maintains dominant share), energy drinks (enhanced by its acquisition of Rockstar Energy), and bottled/carbonated water. It is likely, current innovation efforts, particularly to expand in low sugar CSDs and sports drinks, aligns with consumer preferences and leverages its strong brands. Pepsi faces risks that consumers spurn its fare in favour of healthier options and that online distribution grows, but it is surmised as, the firm is well positioned to manage these challenges. It is held for investments to reformulate products (without altering the taste profile) combined with the addition of healthier brands should appeal to consumers looking for wholesome products. In analysts view, Pepsi’s resources should ensure its fare wins regardless of the channel in which consumers opt to shop.

Financial Strength

It is held that Pepsi maintains solid financial health, which should enable it to support growth while also returning excess cash to shareholders. At the end of fiscal year 2021, the firm’s net debt/EBITDA stood at approximately 2.5 times, with approximately $40 billion of debt outstanding against nearly $6 billion in cash and investments. Debt maturities over the next three years approximate one-quarter of its outstanding debt balance, which is seen, Pepsi can cover with its cash on hand, the $3.5 billion in proceeds received in fiscal 2022 from the sale of Tropicana, and the $7.5 billion available through its revolving credit facilities. It is projected net debt/EBITDA will decline to 0.8 times by fiscal 2031. Pepsi’s balance sheet strength is buttressed by its strong cash flow generation, as analysts forecast free cash flow as a percentage of sales will average around 12% over the next 10 years (generally in line with historic levels). It is likely Pepsi will direct additional resources toward capital expenditures each of the next two years (equating to 5.5% of sales on average) in order to add manufacturing capacity for in-demand products, automate and digitize the supply chain, and invest in e-commerce before returning to its historic 5% average through the remainder of experts 10-year explicit forecast. However, it is not considered that elevated capital expenditures will come at the expense of its commitment to return excess cash to shareholders. Analysts forecast the firm will raise its dividend at a high-single-digit annual clip (maintaining a payout ratio of around 70%). It is also alleged that Pepsi will repurchase nearly 1% of shares outstanding on an annual basis, which is viewed to be a prudent use of cash when the stock trades below experts assessment of its intrinsic value. While it is likely the firm will also remain a consolidator in the space, experts don’t model future tie ups due to the uncertainty surrounding the potential size, timing, and valuation.

Bulls Say’s

Given its dominant share in Latin American snacks, more than 23% per Euromonitor, it is likely for Pepsi to benefit from favourable demographic and disposable income tailwinds in the region.
Despite holding the top spot in global sports drinks, it is held Pepsi is poised for further category gains as it launches innovation aligned with evolving consumer trends, including for Gatorade Zero and Gatorade Light.
It is alleged Pepsi’s robust cash flow generation affords the opportunity to invest in its brands, distribution, and capacity.

Company Profile

PepsiCo is a leading provider of snacks and beverages globally with prominent brands including Pepsi, Mountain Dew, Gatorade, and Aquafina in the beverage space and Lays, Cheetos, and Doritos within snacks. The company maintains dominant share of the global snacks industry with six of the top 10 savoury snack brands and the number two position in the carbonated soft drink, or CSD, category globally along with key brands in bottled water and sports and energy drinks. Overall, the company earns 60% of its revenue and two thirds of its operating profit in North America, although it serves Europe, Latin America, Africa/Middle East/South Asia, and Asia Pacific through separate business units.

(Source: MorningStar)

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