08 October 2009

PEP: Income Statement Analysis for the September 2009 Quarter

PepsiCo, Inc., (NYSE: PEP) earned $1.09 per share in the 12 weeks that ended 5 September, up from $0.99 last year.  This post examines the Income Statement and compares the figures on it to our "look-ahead" estimates.

In a second article, we will report PepsiCo's scores as measured by the GCFR Financial Gauges.  The follow-up post will also provide the latest figures for the financial metrics we use to analyze Cash Management, Growth, Profitability and Value.

Our principal sources were the earnings announcement, the 10-Q for the quarter, and the Seeking Alpha conference call transcript.  Some background information about PepsiCo and the business environment in which it is currently operating can be found in the look-ahead.

The company reported it is "on-track with its plans to acquire" Pepsi Bottling Group, Inc. (NYSE: PBG) and PepsiAmericas, Inc., (NYSE: PAS).  The proposed transactions are expected to close later this year or early in 2010.   Eric J. Foss, PBG's Chairman and CEO, will become CEO of the new PepsiCo Bottling North America (PBNA).

Please click here to see a full-sized, normalized depiction of the actual and projected results for the just-concluded quarter, as well as the quarterly Income Statements for the last couple of years.  Please note that our organization of revenues, expenses, gains, and losses, which we use for all analyses, can and often does differ in material respects from company-used formats.  The standardization facilitates cross-company comparisons.

Revenue in the third quarter, on a GAAP basis, was 1.5 percent less than in the year-earlier period.  We had, by an odd symmetry, expected an increase of 1.5 percent.  We were looking for constant-currency Revenue growth of about 7.5 percent and a 6 percent reduction for changes in exchange rates.  In actuality, Pepsi achieved constant-currency Revenue growth of 5 percent, less 6.5 percent due to exchange rates.

PepsiCo International is the division in which Revenue increased the most,  2.5 percent, in the September quarter.  Revenue at the PepsiCo Americas Beverages division fell 9 percent.

The Cost of Goods Sold in the quarter equaled 46.8 percent of Revenue, which translates into a Gross Margin of 53.2 percent.  The Gross Margin was a little better than last year's 53.1 percent, for which PepsiCo deserves some credit, but we thought the margin would reach a more profitable 54.0 percent.

Sales, General, and Administrative (SG&A) expenses were 32.9 percent of Revenue, nearly a full point and more less than our 34-percent estimate.  In the September 2008 quarter, these expenses were 35.4 percent.

The charge for amortization of intangible assets was a little worse than our expectations.

The lower-than-anticipated SG&A charges nearly compensated for the below-expectation Revenue and Gross Margin.  As a result, Operating Income was a only $36 million below our target.  Operating Income was 12.5 percent more than in last year's third quarter.

FLNA contributed more than to Operating Income than any other division, but Operating Income increased the most on a percentage basis at the Asia, Middle East, and Africa division.  Operating Income was down 11 percent at Latin America Foods.

We rarely do well at predicting the erratic "Bottler equity income," and this quarter was no exception.  Our target was income of $72 million, and the actual figure was a much more profitable $146 million. 

The Net Interest Expense was $30 million less than we expected. However, interest expenses were greater than last year because the company now has more debt.

The Income Tax Rate was 24.9 percent, down from 25.9 percent in the year-earlier quarter.  We expected a tax rate of 26 percent.  

Net Income in the quarter was 8.9 percent more that in the year-earlier period.  Better-than-expected equity income and the less onerous interest payments enabled Net Income to exceed our prediction by 3.6 percent.  Earnings per share were up 10.1 percent.

Full disclosure: Long PEP at time of writing.

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