Valuentum Securities, led by analyst Brian Nelson, warned in a note yesterday that PepsiCo faced “fierce competition” in beverages from The Coca-Cola Company and Monster Beverage Corporation, while the negative effects of a “backlash against unhealthy snacks” was hitting its Frito-Lay snacks business.
During what they described as an “underwhelming” Q2 for the firm, PepsiCo Americas Beverages grew net organic revenue only 2% despite pricing that was 3.5% higher, Valuentum noted.
“We suspect PepsiCo Americas Beverages [PAB] will continue to struggle as it doesn’t offer a very good product in the growing energy drink space, and we believe Powerade Zero is taking market share away from Gatorade,” the research firm wrote.
It added that PepsiCo’s beverage business was tremendously important to the firm’s overall sales and profit mix, but warned: “We think it could continue to lag the competition”.
Energy drink ‘wildcard’
Discussing PepsiCo’s Q2 results with analysts last Wednesday, CEO Indra Nooyi admitted the firm had fewer ‘tailwinds’ – factors encouraging favorable growth – than rivals in regard to energy drinks.
Nonetheless, Nooyi said PepsiCo was driving sports drink growth with additions to its Gatorade G Series line, and the launch of carbohydrate-heavy ‘Prime Chews’ under this brand.
On energy drinks, Nooyi said: “The energy drink is the big wildcard and something we distribute [via a deal with Rockstar Energy] but we don’t get as much tailwind as the market does.”
Speaking more broadly of PepsiCo’s beverage business, Valuentum said: “Unlike Coca-Cola, which has acquired and expanded popular brands like Glaceu (Vitamin Water), Zico Coconut Water and Honest Tea, PepsiCo hasn’t made many meaningful beverage acquisitions over the past few years.
“The firm is behind the curve in the beverage market and has yet to play catch up,” the research firm added.
Splitting the business…
Although the Q2 performance PepsiCo Americas Foods was better – it outstripped PAB for the first time with sales of $5.7bn – Valuentum's analysts described PepsiCo’s overall results as ‘mediocre’.
“We’d really like the firm to separate its food and beverage businesses, as we think it is executing well in foods but could use new management and innovation in its beverage business,” they said.
Despite shares yielding over 3% per year at current levels, Valuentum said it did not think that PepsiCo’s dividend was (A) particularly safe or (B) likely to grow.
“We’d stay away from shares until the valuation becomes significantly more compelling,” the firm's analysts said.