PepsiCo Offers Up a Cautious Outlook for 2017
Packaged food and beverage titan PepsiCo (NYSE: PEP) completed a year-long trend of meeting and exceeding its own revenue and earnings targets when it released fourth-quarter 2016 results on Wednesday. However, the company also issued a rather muted outlook for 2017, due to management's cautious attitude toward the global macroeconomic environment in 2017.
PepsiCo results: The raw numbers
|Metric||Q4 2016||Q4 2015||Year-Over-Year Change|
|Revenue||$19.51 billion||$18.59 billion||5%|
|Net income||$1.40 billion||$1.72 billion||(18.6%)|
|Diluted earnings per share||$0.97||$1.17||(17.1%)|
DATA SOURCE: PEPSICO.
What happened with PepsiCo this quarter?
Net revenue increased 5%, bringing total 2016 revenue to $62.8 billion. Versus last year, PepsiCo's top line was essentially flat, as the company recorded $63.1 billion in revenue in 2015.
Organic revenue, or reported revenue adjusted for items such as currency effects and acquisitions, as well as a 53rd reporting week in calendar 2016, increased by 3.7% for both the quarter and the full year. This met the company's goal of achieving "approximately 4%" organic revenue growth in 2016.
Operating income expanded by roughly 5% versus Q4 2015. The change resulted almost entirely from the leverage contributed by additional sales, as both gross margin and operating margin were flat for the quarter.
The net income and diluted earnings-per-share (EPS) declines in the table above were driven by interest expense and taxes. Interest expense rose 88% to $594 million. While higher debt balances contributed to this increase, the company also recorded a $233 million charge to interest expense during the quarter, when it redeemed $2.25 billion of senior notes due in 2018 and 2019. The charge was related to early redemption fees on these notes, but retiring the debt, which carries interest payable ranging from 5.125% to 7.5%, will save the company cash versus holding to maturity.
Income tax expense increased by 90% to $414 million, with the difference arising from a net tax advantage in the fourth quarter of 2015. Last year PepsiCo recorded a one-time, $230 million non-cash tax benefit when it resolved tax matters from 2010 and 2011 with the IRS, and consequently reduced a reserve for uncertain tax positions.
As has been the case all year, PepsiCo's two largest divisions, Frito-Lay North America (FLNA) and North America Beverages (NAB), helped pace overall company performance, posting organic revenue growth during the quarter of 3% and 2%, respectively. Together, FLNA's sales of $4.9 billion and NAB's sales of $6.3 billion comprised 57% of PepsiCo's total top line in Q4 2016.
During the company's earnings conference call with analysts, management pointed to several visible results of its effort to liberate itself from the fortunes of its declining soda volumes. CEO Indra Nooyi noted that Naked Juice is close to becoming the company's next "$1 billion brand," and also revealed that in 2016, the company's "Everyday Nutrition" products made up 25% of net revenue, versus just 12% for the Pepsi-Cola trademark.
PepsiCo continued to generate attractive cash flow. For the full year, the organization achieved operating cash flow of $10.4 billion, approaching its 2015 mark of $10.6 billion. In the same period, the company incurred capital expenditures of $3.0 billion. Management decided to return most of the net $7.4 billion of free cash flow to shareholders during the year: In addition to share repurchases of $3.0 billion, PepsiCo paid out $4.2 billion in dividends.
PepsiCo raised its dividend by 7% to $3.22 per share, effective with the upcoming June 2017 dividend. This will increase the effective yield on PepsiCo stock from 2.8% to 3%, given the current share price.
What management had to say
After meeting its full-year target of roughly 4% organic growth, and posting adjusted EPS of $4.85 (marking a 6% year-over-year increase), management provided a more moderate 2017 outlook on Wednesday. The company expects 3% organic revenue growth this year, and adjusted EPS of $5.09, which would represent a 5% gain over 2016.
This slight downshift in forecast performance is due partially to expectations of continued currency effects, which have weighed on PepsiCo's results over the past two years. But it also reflects a more skeptical attitude from management about the current global environment for consumer-goods companies. In response to an analyst's question on Wednesday's conference call, CFO Hugh Johnston was quick to point out the general nature of PepsiCo's guarded outlook:
... nothing specific in terms of anything attached to PepsiCo's business performance, I think our 3% revenue guidance reflects just a cautious outlook on the macros globally, as well as a reflection of what is even a more volatile world relative to the volatility that we've seen in the past few years. So the combination of that increased volatility relative to the recent past, and our general caution as we provide guidance at this time of the year, has led us to the ... at least 3% growth outlook.
While investors may have wanted to hear a more aggressive plan for both the top-line and EPS growth for the current twelve-month period, it's worth observing that PepsiCo's management has consistently issued conservative guidance over the last several quarters, as Johnston alluded to. As we look forward to Q1 2017 results, it's also pertinent to note that PepsiCo has made exceeding its own guidance something of a pattern in recent earnings reports as well.
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