Pepsi reported net revenue of $27.8bn over the fourth quarter, up 2.1% on an organic basis. That reflects a 1% rise in volumes for both food and beverages.
Underlying operating profit rose 13% to $2.3bn. Several items were included in underlying figures that have inflated the numbers. Excluding those items profit was lower than expected.
Free cash flow for the full-year fell from $8.1bn to $7.5bn, largely due to the timing of payments. Net debt was $35.0bn at the end of the period.
Guidance is for low-single-digit organic revenue growth and mid-single-digit underlying EPS growth in 2025.
The shares were down 2.2% in pre-market trading.
Our view
Fourth quarter results were muddied by some favourable accounting but failed to mask an underwhelming performance. Guidance was also on the low end too, so it’s not overly surprising to see shares trade lower as a result.
Pepsi is still struggling with volume growth and cost-cutting initiatives have continued at pace, which is helping to offset some of the impacts and keeping profits moving higher. That's fine for now, but remember, cost cuts are more like a plaster than a longer-term treatment.
Looking ahead, we anticipate easing cost inflation, which should slow the rate of price hikes and revive some demand for Pepsi's products. Growth from a more sustainable mix of price and volume would be welcome, but nothing is guaranteed.
Unlike rival Coca-Cola, it doesn't limit itself to soft drinks. Pepsi's products include snack brands such as Walkers crisps and Doritos. Pepsi’s wide range of top-quality brands can help soften the blow if any one brand underperforms, which is exactly what we’ve seen recently. A high-profile recall of Quaker Oats products after concerns that they could be contaminated with salmonella bacteria continues to cost the group. But things could be much worse if other blockbuster brands weren’t on hand to pick up some of the slack.
It’s also worth noting that Pepsi's business model varies considerably by region. It'll manufacture products in some markets, and in others, it hands over almost complete control to a licensing partner - such as Britvic in the UK. On the one hand, that makes Pepsi more capital intensive thanks to investments in factories and production equipment, increasing risk, but it's also allowed manufacturing processes to benefit from scale.
At $35.0bn, net debt is higher than we’d like. It’s not cause for concern at the moment, but we’d hope to see this start to come down again, especially as interest rates look set to remain higher for longer, which increases the cost of rolling this debt over.
We consider Pepsi's variety of brands and history of strong execution a real bonus. But with volumes struggling, we're likely to see the rate of price hikes slow in the near term, and revenue and profit growth along with it.
Pepsi's valuation sits a little below its long-term average, and doesn’t look overly expensive, but there’s still a lot of pressure to deliver consistent performances.
Environmental, social and governance (ESG) risk
The food and beverage industry tends to be medium-risk in terms of ESG though some segments like agriculture, tobacco and spirits fall into the high-risk category. Product governance is a key risk industry-wide, especially in areas with strict quality and safety requirements. Labour relations and supply chain management are also industry-wide risks, with other issues varying by sub-sector.
According to Sustainalytics, Pepsi’s management of ESG risk is strong.
The group has strong anti-bribery and adequate human rights policies in place. Despite this, Pepsi is involved in significant human rights issues within its supply chains. Pepsi is also exposed to food safety issues that could result in customer health impacts and associated lawsuits which could potentially damage the brand and lead to financial repercussions.
Pepsi key facts
All ratios are sourced from LSEG Datastream, based on previous day’s closing values. Please remember yields are variable and not a reliable indicator of future income. Keep in mind key figures shouldn’t be looked at on their own – it’s important to understand the big picture.
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