PepsiCo’s challenges are a problem spanning the entire snacking sector

PepsiCo’s (PEP) mixed second-quarter earnings left investors disappointed, with results showing a decline in some of the company’s snacks segments. RBC Capital Markets Managing Director Nik Modi joins Market Domination to discuss his outlook on the snacks industry.

Modi notes that PepsiCo is a “high-quality company,” while acknowledging that the top line was a major concern in this earnings report. He says PepsiCo’s challenges stem from broader economic trends, noting that consumers are increasingly feeling the economic pressure. “This isn’t just a PepsiCo problem, this is a problem for the entire snack industry,” Modi emphasizes.

Still, Modi singled out alcohol company Constellation Brands (STZ) as a top pick: “This company has been able to deliver exactly what it said it would in its beer business for the last ten years.” Constellation Brands shares have risen more than 3.5% since reporting mixed first-quarter earnings last week.

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This post was written by Angel Smith

Video Transcription

Inflation is taking its toll.

Pepsico sounded the alarm about consumer spending in the latest quarter, when Frito Lay sales in North America fell 4%, but there are still opportunities for investors in the broader consumer staples category.

And now we’re looking at how you can navigate this space using the Yahoo Finance playbook, Nick Mode R BC Capital Markets, Managing Director, Nick, good to see you.

Well, let’s start with PepsiCo.

Nick, I’d like to hear your thoughts on the earnings report and whether you think there are any references in the report to other companies in your area, Nick.

Sure, Josh.

Well, Pepsico is an incredibly high-quality company.

There is no doubt about it.

Well, you don’t have to worry about whether they will make profits because I think they have a very good productivity rate and are very good at managing net profit (NPL).

But the real problem is at the upper end, namely the snacks category, which is under a lot of pressure for a number of reasons.

I think part of this is due to economic pressures, especially among low-income consumers, who tend to over-index into this category.

So I think that’s partly what they have to do with it.

This isn’t just a Pepsico problem.

It’s a problem across the snack industry, and honestly, the entire packaged food industry is under a lot of pressure when it comes to the numbers that you mentioned in terms of this earnings season.

It will be abundantly clear that packaged food companies will have to spend more money than they originally anticipated to actually increase sales in the current environment.

And here’s Julie, Nick.

When you say spending more money, do you also mean lower prices for consumers?

Well, I think yes and no. I think they’ll do a lot of temporary promotions now to really understand how consumers react to different price levels.

It’s not just about price reductions, you know, there are other alternatives, you can offer smaller packages at a lower price, you can offer innovations that can bring benefits that consumers are willing to pay for.

So instead of a price reduction, we get a small price increase, without actually raising the price.

So there are many things they can do.

But yes, I think promotion and marketing spend will increase in the second half of this year.

You know, Nick, it was interesting to read about PepsiCo Management, how they talked about the consumer and the continued inflationary pressures, the higher cost of borrowing, you know, the tighter financial situation for households.

Is that, is that how you see the consumer, Nick, based on the companies that you cover?

Yes of course.

Well, as you can see, inflation, you know, the 30% increase in the prices of these products over the last few years, has taken its toll.

But it’s not just about inflation in those categories, it’s about inflation and everything that consumers do, from their electricity bills to their insurance bills to their mortgages.

And we really need to understand this in a broader perspective.

We look at the total portfolio problem, and consumer products are only one part of it.

Well, that’s something these companies have to deal with, considering how much prices have gone up in the last two years.

So let’s get into what you’re doing, Nick, still within your business and specifically around beverages, I think it’s really interesting that you highlight Constellation brands as one of your offerings because it’s one of those brands that, as you noted in your last note, investors don’t really believe in.

And maybe they didn’t believe the beer story in general.

Why do you believe this?

Well, I mean, you know, we tend to take the long term approach.

This company has been delivering exactly what it promises in the brewing industry for 10 years.

All of our work with distributors and retailers indicates that there is still significant growth potential in terms of market penetration across the country, as well as in Pacifico and even Madea Clara, which has become quite a big business for Constellation.

I believe the management team is doing everything it needs to do.

I think there is still a lot of potential for growth.

I still believe that high single-digit revenue growth is the right path for this company in the coming years.

And I just don’t think the valuation reflects that.

I have no control over how investors perceive the information, but from what I see, it looks like they are actually doing everything they said they would do and outperforming all of their competitors, but trading at a discount. Nick, another name you like.

And I think it’s interesting, I’d like to hear the story. Monster Beverage, you know, the stock hasn’t been in the red this year, in the last 12 months.

But you, you, you see that better times are coming.

Why?

Yeah, I think, you know, to me, Monster, you know, we’ve had a bond monster for over 10 years in a row, and stocks are up, you know, 3.5 times in that time, to me, Monster, the real thesis is that this is the next global megabrand, right?

When you think of Red Bull or Coca-Cola, these powerful brands have shown that they can transcend categories and countries.

That’s why I think this brand has great development opportunities internationally.

Think about it, Josh, there are more people in China drinking energy drinks than in the US.

APPROX?

And they haven’t gained much popularity yet.

This category continues to grow and India is a perfect example of this.

So I think there’s a lot of potential for growth, but when I think about where we are right now with the stock, given the decline that’s happened, I think it’s a good time to buy the stock if you’re a new investor or even an existing investor because I think the second half will improve with a series of investments.

They plan to raise prices in November, which I think will help increase revenue.

And the international growth story continues to gain momentum, Nick.

It’s nice to have you on the program today.

Thank you for your time.

I appreciate it.

Of course.