Is Pepsi Stock A Buy After The Q4 Earnings?

  • PepsiCo’s Q4 2015 Core EPS of $1.06 was in line with estimates.
  • PepsiCo’s innovation culture still permeates the company.
  • PepsiCo increased dividends for the 44th consecutive year. Plans $3 billion share buy back.

On 11th Feb 2016, beverage and snack conglomerate Pepsico (NYSE:PEP) reported Q4 2015 “core earnings” of $1.06 per share, which matched estimates. In FY 2015, PepsiCo’s revenue did very well on an “organic” basis. It expanded 5% YoY after factoring out items such as currency, restructuring, acquisitions/divestitures. “Core constant currency” earnings per share came in at $4.57 representing a 10% expansion YoY. Overall, PepsiCo performed ok in 2015, and its management remained positive on its long-term prospects.

Innovation and expansion encouraging

PepsiCo really understands its “innovation advantage”. Company management realizes that PepsiCo must come up with new and compelling products to keep the final consumer coming back. During the earnings call, PepsiCo’s management touted its many new products that have an impact, or the potential to make an impact, such as Stubborn Soda, Stacy Pita Snacks and new brands of Gatorade. Moreover, PepsiCo talked about the expansion of important relationships with Walt Disney (NYSE:DIS) in China and Subway throughout different parts of the globe.

Innovation and expansion contributed to PepsiCo’s volume gains. North American performance was ok, with Frito Lay and North American Beverage divisions expanding their volumes by 1% in 2015. However, as usual, snacks performed better overall than beverages; the best snack performance was in PepsiCo’s Asia, Middle East and North Africa (AMENA) segment with a YoY volume expansion of 4%.

Global headwinds

Like most multinational companies, PepsiCo struggled with many headwinds across the globe, including the strong dollar, increased regulation, social upheaval, war, etc. The strong dollar caused reporting issues as well as transactional issues across borders. Interestingly, in some areas, PepsiCo is “localizing sourcing” in an effort to combat the inflationary headwinds caused by the strong dollar relative to many currencies throughout the globe.

Reported fundamentals

The strong dollar wreaked havoc on PepsiCo’s 2015 reported fundamentals. Revenue and net income decreased 5% and 16%, respectively, YoY last year. The strong dollar negatively impacted net revenue readings by 10%, according to PepsiCo’s earnings announcement. PepsiCo demonstrated its focus on free cash flow. In 2015, its reported free cash flow expanded 2% YoY due in part to a 4% reduction in capital expenditures. This is definitely something a business owner wants to see.

PepsiCo shows shareholders “The Money”

Speaking of cash, PepsiCo currently prioritizes paying dividends over stock buybacks, representing a plus for share owners seeking income. PepsiCo intends on paying shareholders $4 billion in dividends versus $3 billion in share buybacks. PepsiCo’s management proudly touted its 44 consecutive years of dividend increases and discussed its importance in total shareholder return. They said this is achieved through consistent expansion in profitability and payout ratios. In 2015, PepsiCo paid out a reasonable 51% of its free cash flow in dividends versus 48% in 2014.

Long-term debt expansion

PepsiCo expanded its long-term debt load 23% in 2015. PepsiCo’s reported that operating income exceeded interest expense nine times in 2015 versus eleven in 2014. Investors should become concerned if times interest earned falls below five. Long-term debt as a percentage of stockholder’s equity went from 136% in 2014 to 243% in 2015.


PepsiCo remains upbeat about its future. Management stressed that innovation, efficiency, productivity and financial discipline could serve as catalysts for fundamental expansion, potentially translating into superior total shareholder return over the long-term. In 2016 alone, PepsiCo’s management asserts that it could potentially achieve 4% organic growth in its top line. The implication here is that adverse foreign currency translations could muddy the waters on its reported financials again next year. Finally, over the long-term PepsiCo’s financial discipline and shareholder commitment warrant a place for the company’s stock in your portfolio.

William Bias William Bias   on Amigobulls :
Author's Disclosures & Disclaimers:
  • I am not an investment advisor, and my opinion should not be treated as investment advice.
  • I am not being compensated for this post (except possibly by Amigobulls).
  • I do not have any business relationship with the companies mentioned in this post.
Amigobulls Disclosures & Disclaimers:

This post has been submitted by an independent external contributor. This author may or may not hold any positions in the stocks discussed. Neither Amigobulls, nor any members of its staff hold positions in any of the stocks discussed in this post. Amigobulls has not verified the author’s positions in the stocks discussed, and does not provide any guarantees in this regard. The author may be paid by Amigobulls for this contribution, under the paid contributors program. However, Amigobulls does not guarantee the authenticity or accuracy of the information provided by the author in this post.

The author may not be a qualified investment advisor. The opinions stated in the post should not be treated as investment advice. Buying and selling of securities carries the risk of monetary losses. Readers/Viewers are advised to carry out their own due diligence and consult their investment advisors before making any investment decisions.

Amigobulls does not have any business relationship with any of the companies covered in this post. This post represents the views of the author/contributor and may not reflect the views of Amigobulls.

show more

Comments on this article and PEP stock

user profile picture
Their debt level is insane

I doubt they can keep raising the dividend and do buyback without the debt
1 reply
user profile picture
Hi Harshal,

Probably not. PepsiCo should spend money to reduce debt instead of buying back stock for the time being.

Thanks for reading.

Do share this awesome post