Frito-Lay is clearly the star division, growing revenues every year and by a significant amount. Over six years FLNA revenue has grown 26%, for a CAGR of 3.93%. Every other division has had challenges at some point, including the namesake soft drink and beverage business in the U.S. Nevertheless, the other divisions are not struggling like some of the other large name brand packaged foods companies.
In years prior to 2019, the Division Review section of the PepsiCo's annual report broke out revenue, GAAP operating profit, and non-GAAP operating profit, along with adjustments and special one-time charges by division. Starting in 4Q19 PepsiCo appears to have ceased reporting revenues by Division, publishing only year-over-year net changes in the revenue. The numbers for 2019 are calculated using the percentage changes shown in the 2019 annual report from the 2018 revenues reported in the 2018 annual report, but these numbers may not match PepsiCo's internal figures.
The 2020 10K appears to use the same structure used in the 2019 10K, meaning that revenues by Division are not available for 2020 either, and the 10K does not provide more detailed information than the annual report. Therefore 2020 revenues by division are also calculated by extrapolation: the 2019 extrapolated division revenue and the 2020 revenue change figures are used to calculate the 2020 division revenues. Red shaded cells indicate extrapolated figures. Since we don't have base 2018 figures for APAC, and we don't know how AMENA may have contributed to the definition of APAC, we don't have revenue figures for AMESA or APAC in FY19 or FY20. The back-calculated totals are shown in italics on the AMENA line for '19 and '20. These should be correct, but based on what we get from the published reports, we can only be 85% sure.
Looking at GAAP operating profits, which include special adjustments such as currency exchange, discontinued operations, restructuring, impairment charges, mark-to-market, and merger charges, FLNA is still the clear star of the portfolio. Total operating profit grew 31.7%, for a CAGR of 4.7%. In contrast, PBNA (NAB) is seeing dwindling profits as the U.S. retreats from soda pop. Quaker (QFNA) is only holding its own, but it is dwarfed by Frito-Lay, which is generating profits nearly ten times the size of Quaker's. FLNA generates half of PEP's operating profits.
Computing operating margins by division, it's clear that PEP's prospects are driven by the growth of Frito-Lay and its profitability. QFNA is also reasonably profitable, but even if it were growing rapidly, its contribution would still be small relative to FLNA.
FLNA maintains 30% margins consistently, QFNA is less consistent but still manages average margins of 24%. The rest of the divisions manage about 12% operating margins, which is not quite adequate for a world-class food business.
Since we don't have reliable revenue figures for AMESA and APAC, we've skipped computing operating margins for those segments, but they are probably similar to the margins of the other regional segments.
Investment Valuation
Does any of this new information change the valuation we computed in part 1? Probably not. FLNA is stable, and although the other segments are not stellar performers, they have room for improvement. The other regional businesses have the potential to grow their snack businesses into a shape that resembles the success of FLNA, with greatly improved sales growth and operating margins. PEP can even suffer a few more years of sluggish beverage sales in PBNA, and still not see any substantial change to the overall cash generation of the business.
Potential obstacles:
- Activist investors attempt to break up the company, which then hinders the economy of scale of the regional businesses and makes it more difficult for snacks and beverages to growth in Latin America, Europe, and Asia.
- Large acquisitions that soak up capital or diminish FLNA by taking management attention away from organic growth of snacks in overseas markets.
- Excess diversification in food products. Quaker doesn't seem to have injured PEP, but other attempts to gain revenue through expensive acquisitions could be problematic.
- Excess worldwide diversification. Does PepsiCo focus on doing the right thing in each country market? Does it build product integrity, or does it just fling its products into markets hoping that some will stick?
Reference: Division Alignments
PepsiCo divisions were realigned in 2019. This action appears to have created a new division, APAC, and resulted in the renaming of several others. The company calls these reportable segments and describes them as follows:
- FLNA: branded food and snack businesses in the United States and Canada;
- QFNA: cereal, rice, pasta and other branded food businesses in the United States and Canada;
- PBNA: beverage businesses in the United States and Canada;
- LatAm: beverage, food and snack businesses in Latin America;
- Europe: beverage, food and snack businesses in Europe;
- AMESA: beverage, food and snack businesses in Africa, the Middle East and South Asia;
- APAC: beverage, food and snack businesses in Asia Pacific, Australia and New Zealand and China.
Some of the former division descriptions:
- Europe Sub-Saharan Africa (ESSA): beverage, food and snack businesses in Europe and Sub-Saharan Africa;
- Asia, Middle East and North Africa (AMENA): beverage, food and snack businesses in Asia, Middle East and North Africa.
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