Packaged food and beverage titan PepsiCo Inc. finishes a successful year of coinciding and even beating its own and analysts’ revenue and earnings targets in its recent fourth-quarter earnings release, but with a much quieter outlook for 2017.
While the company expects continued modest growth in revenue and earnings per share (EPS), a muted outlook is forecasted due to PepsiCo management's cautious approach toward the global macroeconomic environment for this year.
PepsiCo quarterly earnings
On Wednesday, the snacks and beverage conglomerate reported that net revenue climbed 5%, bringing the revenue for 2016 at $62.8 billion. Compared with the same period in the preceding year, PepsiCo's top line was essentially flat, as the company delivered $63.1 billion in revenue in 2015.
Organic revenue and a 53rd reporting week in 2016, edged higher by 3.7% for both the fourth-quarter and the full year. This coincided with the company's goal of reaching an approximate of 4% organic revenue growth in 2016.
Operating income grew by an estimated 5% versus 2015’s fourth-quarter. The growth resulted mostly from the leverage contributed by additional sales, as gross margin and operating margin were flat.
Meanwhile, the net income and weak earnings-per-share downticks were driven by interest expense and taxes; interest expense increased a hefty 88% to $594 million. While higher debt balances contributed to this rise, the Mountain Dew and Cheetos producer also recorded a $233 million charge to interest expense during the fourth-quarter, when it redeemed $2.25 billion of senior notes due in 2018 and 2019.
Income tax expense moved higher by 90% to $414 million, with the difference stemming from a net tax advantage the same period a year earlier. In 2016, PepsiCo notched a record of a one-time, $230 million non-cash tax benefit when it fixed tax troubles from 2010 and 2011 with the IRS, and accordingly lowered a reserve for ambiguous tax positions.
PepsiCo also continued to generate an attractive cash flow of $10.4 billion for the full year, nearing its 2015 mark of $10.6 billion. During the same period, the snack and beverage corporation incurred capital expenditures amounting to $3.0 billion. Management decided to return most of the net $7.4 billion of free cash flow to shareholders during the year; PepsiCo paid out $4.2 billion in dividends.
PepsiCo raised its dividend by 7% to $3.22 per share, effective with the future June 2017 dividend. This will lift the effective yield on PEP shares from 2.8% to 3%, given the current share price.
PepsiCo is the parent company of Pepsi, Frito-Lay and Tropicana. The company’s two biggest divisions, Frito-Lay North America (FLNA) and North America Beverages (NAB), helped boost overall company performance. The two sectors delivered organic revenue growth during the fourth-quarter of 3% and 2%, respectively. In total, FLNA's sales of $4.9 billion and NAB's sales of $6.3 billion covered 57% of PepsiCo's total top line in the quarter.
During the PepsiCo’s earnings conference call with analysts, management indicated a number of visible results of its effort to liberate itself from the fortunes of its decreasing soda volumes. CEO Indra Nooyi remarked that Naked Juice is close to becoming the company's next “$1 billion brand”. He also revealed that in 2016, the company's Everyday Nutrition products accounted for 25% of net revenue, compared with the Pepsi-Cola trademark which only comprised just 12%.
PepsiCo management remarks, outlook
After hitting its full-year target of nearly 4% organic growth and reporting adjusted EPS of $4.85 that marks a 6% year-over-year increase, PepsiCo management offered up a more cautious 2017 outlook. The firm projects 3% organic revenue growth this year, and adjusted EPS of $5.09, which would indicate a 5% increase over 2016.
What caused the weaker-than-expected forecast performance is partially stemming from expectations of continued currency effects, which have dragged PepsiCo's results over the past two years.
However, it also represents a more doubtful attitude from management about the current global environment for consumer-goods establishments. At the conservative guidance, shares of PepsiCo fell as much as 2% to $104.77 in Wednesday’s trading session. The stock ended the trade with a 0.18% loss to $106.73, and recovered meekly with 0.02% in premarket hours today.
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