PepsiCo Just Gave Investors Another Reason to Like the Stock

PepsiCo (NASDAQ:PEP) might soon earn a place on more investors’ lists of growth stocks. The consumer packaged-foods giant this week announced a surprise double-digit sales spike for its fiscal second quarter, which lapped some of the biggest COVID-19 volume surges it saw in early 2020. CEO Ramon Laguarta and his team also raised their 2021 outlook on sales and profitability, making an even stronger case for buying this dividend giant.

Let’s dive right in and see what else the earnings report had to say.

A woman eating a snack bar outdoors.

IMAGE SOURCE: GETTY IMAGES.

PepsiCo is beating targets

The dust is starting to settle from all the pandemic-related effects on Pepsi’s growth, and the picture that’s emerging is one of market-leading expansion. Organic sales jumped 13% year over year in the three-month period that ended in mid-June. Wall Street was looking for a more modest increase following last quarter’s 2% uptick.

As expected, the prepared-foods portfolio shrank when compared to the peak pantry-stocking period for consumers last year. Pepsi’s Quaker Foods brand reported a jarring 21% volume drop year over year.

But the snack segment grew 6% year over year, and Pepsi logged a sharp rebound in its beverage business as consumers returned to more normal mobility patterns in the U.S.

Volumes are up a strong 8% across the entire portfolio over the first half of 2021. “We are pleased with our second quarter results as we delivered very strong double-digit net revenue and earnings … growth,” Laguarta said in a press release.

Profits and cash flow

The rebound was even stronger on the profit side thanks to rising prices, increased manufacturing efficiencies, and cost cuts. Core earnings jumped 27% after adjusting for currency exchange swings. That metric is up 21% so far in 2021 despite management’s earlier warning that margins might decline as Pepsi invests more in its business.

Cash flow jumped, which allowed the company to pay down some of the debt it took on during the crisis phase of the pandemic last year while still issuing higher dividends. Pepsi also spent almost nothing on stock buybacks as it prioritizes those other capital uses.

PepsiCo has a bubbly outlook

The biggest takeaway from the report is that Pepsi can reasonably target record growth in 2021. Sales are now on pace to rise by 6%, executives said, which would be an improvement over its previous two years of solid results. Earnings will now rise faster than sales, too.

That picture of accelerating sales gains and rising margins describes the type of growth business that Laguarta has been trying to steer Pepsi toward becoming, with moves like upgrading the manufacturing platform and pushing into the energy drink niche.

Executives had been implying that these initiatives would start showing clear results by late 2021 or early 2022. But this latest report confirms that they’re already moving the needle. That means shareholders have a good chance at impressive returns.

Add its almost 3% dividend yield to its double-digit percentage earnings growth, and you’ve got a formula for market-beating returns. The fact that Pepsi shares haven’t participated in the market rally over the last year makes the stock even more attractive as an income investment today.