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Pepsi's Q4 Earnings In Line, Sales Beat; 2016 View Downbeat

PepsiCo, Inc.PEP ended a rather strong year on a soft note. The food/beverage giant marginally beat the Zacks Consensus Estimate for revenues but delivered in-line earnings for the fourth quarter of 2015.

Moreover, the Purchase, NY-based company's 2016 earnings outlook fell short of market expectations. Shares declined almost 2% in pre-market trading .

However, the company raised its annualized dividend by 7.1% to $3.01 per share from $2.81.

Earnings Match Estimates

Pepsi's fourth-quarter core earnings per share of $1.06 were in line with the Zacks Consensus Estimate.

Earnings, however, declined 5% year over year as currency headwinds eroded sales.

With around half of its revenues coming from outside the U.S., Pepsi's sales and profits are being affected by significant currency headwinds due to the recent weakening of many foreign currencies as against the U.S. dollar.

Currency hurt earnings by 8%, in line with management's expectations, since a strong dollar lowered the value of Pepsi's overseas sales.

In constant currency terms, adjusted earnings grew 3% as a lower tax rate and productivity gains made up for the softer organic revenue growth and lower operating margins.

Core earnings mainly exclude a non-cash tax benefit, benefit for a pension-related settlement, and restructuring and impairment charges. Including these items, reported earnings came in at $1.17, up 35% year over year.

Beginning with the fourth quarter, Pepsi is no longer consolidating the results of its Venezuelan operations in the financial statements.

PepsiCo Inc. (PEP) Street EPS & Surprise Percent - Last 5 Quarters | FindTheCompany

Organic Revenues Slow Down

Total sales declined 7% year over year to $18.59 billion largely due to currency headwinds. Foreign exchange (Fx) hurt revenue growth by 8%, same as management's expectations.

Excluding the impact of Fx, revenues increased 4% on an organic basis. However, organic sales growth was softer than the 7.4% rise recorded in the previous quarter as an improved performance in the North American business - mainly snacks - was offset by softness in some of the international markets.

Revenues beat the Zacks Consensus Estimate of $18.52 billion by 0.3%.

Pepsi witnessed an effective net pricing gain of 3%, less than 6% in the past quarter. The inflation-based pricing benefits in Venezuela are no longer available as Pepsi does not include results from its Venezuela subsidiaries from this quarter, which explains softer net pricing benefits. Nonetheless, pricing gains remained strong in North America.

Volumes grew 1%, same as last quarter. Both organic snacks and beverage volumes grew 1%, same as the previous quarter. An improved performance in the North American Frito-Lay snacks business and Asia, Middle East and North Africa (AMENA) segment was offset by weaker results in the Latin America segment.

Organic volumes grew 1% in the Frito-Lay segment, better than 0.5% last quarter. Organic volumes declined 2% in Quaker Foods, another American snacks business, less than the 2% growth reported in the prior quarter. Organic snacks volumes declined 1% in the Latin America segment but rose 1% in Europe Sub-Saharan Africa (ESSA) and 3% in AMENA.

Organic beverage volumes remained flat in ESSA and declined 1% in Latin America. However, beverage volumes grew 3% in AMENA and 1% in North Americas Beverages (NAB).

Carbonated soft drinks (CSD) sales of large beverage companies have been declining, mainly in the U.S., over the past few quarters due to category headwinds. Weak consumer spending environment, cross-category competition and growing health and wellness consciousness are hurting the CSD demand and in turn, the sales of The Coca-Coca Company KO , Pepsi and Dr Pepper Snapple Group, Inc. DPS . However, Coca-Cola, which reported earlier this week, announced that its CSD volumes improved in North America in the fourth quarter.

Operating Margins Decline

Core gross margins improved 165 basis points (bps) backed by effective revenue management strategies and productivity gains.

Core constant currency operating profit declined 2% to $2.33 billion. Core operating margins declined 20 bps as higher gross margin gains and cost reductions were offset by higher marketing costs. Advertising and marketing expenses, as a percentage of sales, rose 85 bps in the fourth quarter.

Core effective tax rate was 22.5%, less than 25.5% a year ago.

2015 Results

In full-year 2015, revenues declined 5% to $63.06 billion. However, revenues marginally missed the Zacks Consensus Estimate of $63.11 billion. Organic revenues increased 5%, in line with management's expectation of its growing in a mid single-digit range.

Adjusted earnings were $4.57 per share and beat the Zacks Consensus Estimate of $4.56 by a penny. However, earnings declined 1% year over year due to currency headwinds of 11%. Core constant currency earnings per share increased 10%, higher than management's expectations of 9%.

2016 Outlook

Pepsi expects core constant currency earnings per share (excluding Venezuela deconsolidation) to increase 8% in 2016. Currency and Venezuela deconsolidation are likely to hurt earnings per share by 4% and 2%, respectively.

Including the headwinds from Venezuela deconsolidation and currency volatility, earnings are expected to increase 2% to $4.66 per share. The guidance fell short of the Zacks Consensus Estimate of $4.76. However, it is important to remember that the two numbers may not be comparable.

Excluding headwinds from currency and structural changes, organic revenues are expected to rise 4%, excluding the impact of an extra week in the year. Currency is projected to hurt revenues by 4%, while the 53rd week is expected to add 1% to sales growth.

Commodity inflation is expected in the low-to-mid single-digit range (including the transaction-related Fx impact). Productivity savings are anticipated to be approximately $1 billion.

Also, management plans to return $7 billion through dividends and share repurchases.

The core tax rate is expected to be roughly the same as 2015 rate of 24.3%. Moreover, interest expenses are likely to be higher than the year-ago tally due to increased debt balances and higher interest rates.

Pepsi carries a Zacks Rank #4 (Sell). A better-ranked beverage stocks is Primo Water Corporation PRMW , carrying a Zacks Rank #2 (Buy).

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COCA COLA CO (KO): Free Stock Analysis Report

DR PEPPER SNAPL (DPS): Free Stock Analysis Report

PEPSICO INC (PEP): Free Stock Analysis Report

PRIMO WATER CP (PRMW): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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