Investors are feeling more optimistic about ( PepsiCo NASDAQ:PEP) as it heads into the final quarter of 2019. The consumer staples giant is seeing faster growth overall thanks to robust demand — and higher prices — across its snack portfolio. The soda division is lagging, but price hikes and cost cuts combined to lift margins in the most recent quarter.
Back in July, CEO Ramon Laguarta and his team predicted weaker results for the second half of the year, on the top and bottom lines. Yet investors are still hoping to see evidence of firming operating trends when Pepsi reports third-quarter results on Thursday, Oct. 3.
Let’s take a closer look.
Two different divisions
The growth story lately has been driven by Pepsi’s U.S. snack foods division. That unit, populated with brands like Doritos and Ruffles, posted a 5% organic sales boost through the first half of the year thanks to a mixture of higher selling prices and increased volume. The snack segment’s profitability is improving, too, with operating profit up 7% over the last six months.
Trends worsened slightly in the fiscal second quarter, though, and so investors this week will be watching for signs of a rebound or a further deceleration. These would show up mainly in sales volume trends, which slowed to a flat result in Q2. Ideally, Pepsi can achieve modestly positive volume while prices rise.
The drink segment continued its recent streak of disappointing results last quarter, with reduced volumes contributing to just a 2% uptick in organic sales. Yet executives said in July that they’re on the cusp of returning to market share growth. That acceleration might not happen this quarter, but investors will at least want to hear concrete predictions about the timing of the soda rebound on Thursday.
Return on investments
Pepsi is planning to ramp up spending in a few places over the next six months, including marketing support for its brands, and investments in upgrading manufacturing and fixing the supply chain. Executives haven’t been able to point to concrete benefits from this spending in recent quarters, saying only that it should support faster growth than the 2% to 3% annual uptick investors have seen in recent years.
Their outlook implies that sales gains will be stuck in that range at least through the back half of fiscal 2019, to put organic growth at 4% for the full year. Per-share earnings should fall by roughly 1%, Pepsi predicts, due to the elevated spending plans.
Investors might be happy to accept a short-term drop in profitability if it lays the foundation for faster growth in 2020 and beyond. The consumer staples leader is sweetening the deal by adding plenty of direct cash returns in the form of stock buybacks and a higher dividend payment.
Its rebound path won’t be clear for some time, though. And since Pepsi is predicting weaker sales and profits in late 2019, investors will likely need to be patient while they wait for concrete signs of the growth rebound that Laguarta and his team have been working on since early 2018.