Core Viewpoint - PepsiCo is experiencing renewed interest from investors, particularly after Elliott Investment Management disclosed a $4 billion stake, suggesting potential for significant upside if the company revitalizes its operations [1][2] Company Overview - PepsiCo is the largest consumer goods company globally, with a market cap of approximately $201 billion, operating in over 200 countries with brands like Pepsi, Frito-Lay, Quaker, and Gatorade [2] - The company has faced challenges in North America due to sluggish demand and changing consumer preferences, leading to a valuation discount compared to competitors like Coca-Cola [2] Stock Performance - Over the past 52 weeks, PepsiCo shares have traded between $127.60 and $179.43, with a year-to-date decline of around 2% before a recent surge bringing the stock back to approximately $147 [3] - The stock is currently trading at an 18.5 forward price-earnings ratio and a price-to-sales ratio of 2.2, which are lower than its five-year historical averages [4] Financial Strength - PepsiCo has a return on equity of nearly 58% and maintains stable profitability, indicating financial robustness despite current market conditions [4] - The company has a dividend yield of around 3%, supported by $7.6 billion in scheduled shareholder distributions this year, and has increased its dividend for over 50 consecutive years [5] Recent Earnings Performance - In the second quarter, PepsiCo reported sales of $22.7 billion, exceeding Wall Street estimates, with earnings per share (EPS) of $1.26 also surpassing expectations [6] - The net income for the quarter was $1.26 billion, showing modest growth compared to the previous year, with international strength helping to offset softness in the North American beverage segment [6]

Core Insights - Constellation Brands and Kraft Heinz have both experienced significant stock declines over the past year, with Constellation down over 40% and Kraft Heinz down about 25%, while the S&P 500 rose nearly 20% during the same period [3][9][12] Constellation Brands - Constellation generates most of its revenue from beer, facing challenges from tariffs and declining demand among younger consumers [5][7] - The Trump administration's tariffs on aluminum have increased from 25% to 50%, impacting Constellation's margins as 39% of its beer shipments come in aluminum cans [6] - The company is attempting to adapt by launching new alcoholic beverages and divesting lower-end brands to focus on higher-end products, which may strengthen long-term margins but hinder near-term revenue growth [8] - For fiscal 2026, Constellation expects organic sales to dip 4% to 6% and comparable EPS to drop 16% to 18%, leading to a stock valuation of 12 times forward earnings [9] Kraft Heinz - Kraft Heinz owns a portfolio of well-known brands but has struggled post-merger due to a focus on cost-cutting rather than brand revitalization [10] - The company faced a $15 billion write-down in 2019 and has since recovered by divesting weaker brands and raising prices, but organic net sales dipped 2% in 2024 [11][12] - For 2025, Kraft Heinz expects organic net sales to decline by 1.5% to 3.5% and adjusted EPS to drop 13% to 18%, with the stock trading at 10 times forward earnings [12] - Kraft Heinz plans to split into two companies by the second half of 2026, but concerns remain about whether this will effectively address its challenges [13] Investment Considerations - Both companies face significant challenges that hinder their attractiveness as investments, with a preference for Constellation due to clearer long-term strategies [14][15]

Core Viewpoint - Kraft Heinz is planning to split into two separate businesses, a decision that has drawn criticism from major investor Warren Buffett, who believes this move may not address the company's underlying issues [1][8][12]. Company Overview - Kraft Heinz is one of the largest consumer staples companies globally, known for its iconic brands like Kraft Mac & Cheese and Jell-O, which are generally considered reliable in various economic conditions [2][4]. - The merger that created Kraft Heinz aimed primarily at cost-cutting, supported by Berkshire Hathaway, which is the largest shareholder [4][5]. Challenges Faced - The merger did not yield the expected results, as the focus on cost-cutting hindered investment in brand development, leading to a decline in competitiveness [5][6]. - Despite changes in leadership and increased investment in innovation and marketing, Kraft Heinz struggled to resonate with consumers, indicating deeper issues within the company [5][6]. Recent Developments - The decision to split the company is seen as a last resort, with concerns that it may not resolve the existing problems and could be perceived as corporate engineering rather than a strategic solution [7][11]. - Buffett has previously labeled the Kraft Heinz deal a mistake and now questions the effectiveness of the split in creating value, suggesting that the company's challenges are too significant for a simple separation to resolve [8][12]. Market Reaction - The announcement of the split led to a swift decline in Kraft Heinz's stock price, reflecting investor skepticism about the decision [9][12]. - Management argues that focused management teams for each new business will simplify operations, but there are doubts about whether two struggling entities will perform better than one [11][12].

Financial Data and Key Metrics Changes - The grocery consumer industry is experiencing a soft environment, with general consumption down and private label growth being flat across various categories [4][6] - The company has focused on driving cost efficiencies and expects to achieve $250 million in gross cost savings [28][30] - EBITDA growth is anticipated to continue into the next couple of years despite a challenging consumer environment [31][33] Business Line Data and Key Metrics Changes - The company has made significant investments in core categories such as crackers, broth, and refrigerated dough, which are performing well [13][14] - The acquisition of Harris Teas is expected to provide a 4% to 5% benefit to sales, offsetting some volume declines from other categories [42][44] Market Data and Key Metrics Changes - The private label market has not seen significant trading down, with consumers managing costs by reducing basket sizes rather than switching to private label products [5][6] - Retailers are increasingly focused on optimizing their private label assortments and pricing strategies to enhance profitability [10][11] Company Strategy and Development Direction - The company is prioritizing profitability and cash flow over top-line growth in response to the current consumer environment [27] - There is a strategic focus on fewer, more profitable categories, allowing for deeper expertise and better service to retail customers [16][19] Management's Comments on Operating Environment and Future Outlook - Management acknowledges the challenges posed by supply chain disruptions and recalls but believes these issues are being addressed through improved capital investment and operational processes [24][26] - The company is optimistic about its ability to navigate the current environment and sees potential for EBITDA growth despite external challenges [31][32] Other Important Information - The company is currently above its long-term leverage target but expects to return to its normal leverage profile by the fourth quarter [62] - There is a belief that the stock price is undervalued, and the company plans to return cash to shareholders if performance aligns with expectations [63][64] Q&A Session Summary Question: What are the thoughts on private label's market share? - Management noted that the grocery consumer is currently soft, with private label growth being flat across categories, and consumers are buying fewer units [4][5] Question: How is the company optimizing its portfolio? - The company has focused on core categories where it can offer the best quality and price, leading to better performance [12][14] Question: What are the risks and opportunities for the full year? - The focus remains on execution and cost savings, with potential upside if consumer trends improve [51][52] Question: How is the company addressing supply chain disruptions? - Management indicated that significant capital investments have been made to improve processes and reduce risks associated with supply chain issues [24][26] Question: What is the outlook for the coffee category? - The coffee category is performing well, with consumers showing resilience despite pricing pressures, and there is an opportunity for trade down behavior [57][61] Question: How does the company view its capital allocation priorities? - The company plans to balance capital between investing in the business and returning cash to shareholders, with no major acquisitions anticipated in the near term [62][63]

Financial Data and Key Metrics Changes - The company experienced a tough first quarter with a decline of 9%, followed by a 4% decline in the second quarter, and a slight improvement in the third quarter with a decrease of 1% to 2% [8][9][10] - Management noted that the overall performance is improving, with consumption data showing some progress, although not as much as desired [10][12] Business Line Data and Key Metrics Changes - The Green Giant business has been a significant challenge, characterized by low margins and high working capital intensity, leading to divestitures of several assets [5][6][7] - The spices and seasonings segment is expected to show consistent top-line growth in the low single digits, with improvements noted in the third quarter [22][23] - The meals business is anticipated to grow at about 1%, with specific brands like Ortega facing competition but showing signs of recovery [25][26][60] Market Data and Key Metrics Changes - The company is observing a slow recovery in consumer behavior, with trade-down behavior and private label resurgence beginning to stabilize [14][15] - Management indicated that consumer budgets remain tight, particularly in the middle and lower segments, but there are signs of improvement in the center store category [15][16] Company Strategy and Development Direction - The company is focused on portfolio restructuring to simplify operations and concentrate on higher-margin businesses such as spices and seasonings, meals, and baking staples [7][31] - Future growth is expected to come from disciplined acquisitions in core categories, aiming for a stable growth rate of 1% on the top line and 2% on the bottom line [30][31] Management's Comments on Operating Environment and Future Outlook - Management expressed cautious optimism about the recovery of top-line performance and the impact of cost-saving measures, including a $10 million cost challenge [52][68] - The company is closely monitoring risks related to top-line recovery and tariff impacts on pricing strategies [78][80] Other Important Information - The company has amended its senior secured revolving credit facility to temporarily increase its maximum consolidated leverage ratio, addressing concerns about net debt to EBITDA [35][36] - The long-term EBITDA margin target remains at 18% to 20%, with current margins impacted by inflation and the performance of the Green Giant segment [42][44] Q&A Session Summary Question: What is the outlook for organic sales growth? - Organic sales in the first half were down about 7%, but sequential improvement is expected in the back half of the year, aided by a 53rd week in the fourth quarter [47][48] Question: How is the company addressing leverage concerns? - The company plans to reduce net leverage to about 6x in the next twelve months through asset sales and improved operational performance [36][38] Question: What are the biggest risks and opportunities for the upcoming year? - The primary risks include the speed of top-line recovery and the implementation of pricing to cover tariff costs [78][80]

Financial Data and Key Metrics Changes - The company spent $100 million on capital expenditures (CapEx) last year and expects to spend a similar amount this year, indicating a significant investment cycle [5][6] - The company is guiding for EBITDA to grow at a mid-teens level year-over-year in the second half, which would represent nearly 200 basis points of year-over-year EBITDA margin expansion [45][46] - Net leverage ticked up to 4.1 times this quarter, but the company maintains its expectation for net leverage to approach three times by fiscal year-end [52] Business Line Data and Key Metrics Changes - Boulder Canyon has been a significant contributor to top-line sales, surpassing the initial target of $100 million and expected to reach closer to $200 million by year-end [18][23] - The productivity program is expected to normalize around 3% to 4% in the future, with current savings at 6% of cost of goods sold (COGS) [8][12] Market Data and Key Metrics Changes - Distribution gains in core markets have been around 10%, while expansion geographies have seen gains of approximately 18% [20] - The company has experienced both value and volume market share gains in core markets for the first time in several quarters [31][32] Company Strategy and Development Direction - The company is focused on supply chain transformation and capital investments to drive productivity and efficiency [4][5] - There is a commitment to maintain a strong brand presence and invest in marketing and innovation, with a target of reaching 3% to 4% of sales in advertising and consumer spending over time [48][50] Management's Comments on Operating Environment and Future Outlook - Management expressed optimism about the salty snack category, noting that household penetration continues to grow, indicating consumer demand [38] - The competitive environment has been rational, with no unusual activity from competitors, which is seen as a positive for the company [36] Other Important Information - The company has been active in the M&A market but has slowed down due to a focus on debt paydown, with a high hurdle for any potential acquisitions [58][60] - The company is seeing improvements in the convenience store channel, which had previously been slower than desired [65] Q&A Session Summary Question: What drove the organic sales growth outlook increase? - The company raised its outlook for organic sales growth due to strong distribution gains and the performance of Boulder Canyon, expecting a good year despite a dynamic competitive environment [42][43] Question: What are the key drivers for EBITDA margin expansion in the second half? - Key drivers include productivity gains from CapEx investments and a discrete item related to the Grand Rapids facility closure, contributing to a strong EBITDA close for the year [45][46] Question: How is the company addressing the slower performance in the convenience channel? - The company acknowledges past assortment management choices that affected performance but is now seeing distribution gains and expects to be around flattish before the end of the year [65]

Financial Data and Key Metrics Changes - The company reaffirmed its full year 2025 organic sales growth guidance of about 5% despite headwinds from U.S. retailer restocking and hot weather in Europe impacting chocolate demand [9][10] - Organic sales in North America declined about 3.5% year over year in the first half, with underlying trends softer than anticipated [13][19] - The company expects a reasonable P&L for 2025 with top-line growth of 4% to 5% and a 10% EPS decline, indicating a challenging year ahead [6][7] Business Line Data and Key Metrics Changes - The company noted that chocolate consumption in Europe was impacted by hot weather, particularly in the U.K. and Germany, leading to a decline in volumes [10][11] - In North America, the company is focusing on optimizing shopping trips and maximizing brand presence, particularly for Oreo, which has seen increased penetration but decreased purchase frequency [17][19] - The company is implementing price pack architecture in Europe to protect specific price points and stimulate consumption through promotional activities [12][27] Market Data and Key Metrics Changes - In emerging markets, the company sees significant growth potential, particularly in India and China, despite current consumer caution [36][40] - Brazil is performing well with good single-digit growth, while Mexico is experiencing a slowdown in consumer offtake [40][41] - Cocoa supply is expected to increase, leading to a potential surplus and a decrease in cocoa prices, which could positively impact margins [32][33] Company Strategy and Development Direction - The long-term strategy established in 2018 remains valid, focusing on building presence in key categories and supporting brand growth [5][6] - The company is exploring collaborations with other brands to drive innovation and market presence, viewing these partnerships as win-win opportunities [20][25] - The cakes and pastries category is identified as a significant growth opportunity, with expectations of reaching $125 billion by 2030 [52][54] Management's Comments on Operating Environment and Future Outlook - Management expressed that consumer spending behavior has not changed significantly over the past two and a half years, with consumers remaining cautious and prioritizing basic necessities [14][15] - The company anticipates continued challenges in North America over the next 6 to 12 months, with a focus on adapting to consumer behavior [19][40] - Management is optimistic about the upcoming Christmas season, expecting stronger engagement and better elasticities as consumers adjust to new price levels [12][29] Other Important Information - The company is closely monitoring cocoa supply dynamics and exploring alternative sourcing to mitigate cocoa price risks [30][34] - The capital allocation strategy remains disciplined, with a focus on smaller M&A opportunities and a pragmatic approach to share buybacks [47][50] Q&A Session Summary Question: What is the outlook for North America in the next 6 to 12 months? - Management indicated that consumers are cautious and spending has not increased, leading to a challenging environment for the foreseeable future [16][19] Question: How does the company view collaborations with other brands? - Collaborations are seen as opportunities for innovation and market expansion, with potential benefits for both parties involved [20][25] Question: What is the company's strategy regarding cocoa supply and pricing? - The company is optimistic about an increase in cocoa supply leading to lower prices, which would positively impact margins [32][33] Question: What are the growth expectations in emerging markets? - Emerging markets are expected to contribute significantly to growth, with a focus on building strong brands and distribution networks [36][39]

Core Viewpoint - Kraft Heinz is planning to split into two publicly traded entities by the latter half of 2026, reversing the 2015 merger, which has been criticized for its poor performance [2][3] Group 1: Industry Context - The spin-off reflects challenges in the packaged food industry, including stagnant demand, changing consumer preferences, and increased competition from private labels [3] - The stock price saw minimal change, increasing by only 1% in pre-market trading, while shares have decreased by 21% over the past year, indicating skepticism from investors [3] Group 2: Company Structure Post-Split - The new structure will consist of Global Taste Elevation Co., which includes higher-growth brands like Heinz and Kraft Mac & Cheese, and North American Grocery Co., focusing on U.S. staples like Oscar Mayer and Kraft Singles [4] - Pre-split, Kraft Heinz was trading at approximately 1.3× sales, lower than competitors like Mondelez (2.3×) and Kellanova (2.2×), but slightly above Conagra (1.0×) and Campbell Soup (1.1×) [5] Group 3: Financial Projections - Management anticipates a 60/40 revenue split between the two new entities, projecting Global Taste to generate around $16 billion and North American Grocery about $11 billion based on a 2024 run rate of $27 billion [6][7] - If Global Taste achieves Mondelez-like multiples of 2.0–2.3× revenue, its market cap could reach $32–$36.8 billion, while North American Grocery might trade at 1.0–1.1×, resulting in a combined value of $43–$49 billion, compared to Kraft Heinz's current valuation of $33 billion [7] Group 4: Market Considerations - The market typically does not assign top-tier multiples to both halves of a breakup; if Global Taste trades at 1.6–1.8× and North American Grocery at 1.0×, the total value could drop to $37–$40 billion [8] - The success of the split hinges on the ability of both companies to achieve consistent growth and restore investor confidence, with proponents viewing it as a chance for independent valuation and skeptics fearing it may expose deeper structural issues [9]

Kraft Heinz, a giant in the packaged foods industry, announces plans to split into two separate publicly traded businesses. https://t.co/hKyy6elJwT ...

Kraft Heinz, a giant in the packaged foods industry, announces plans to split into two separate publicly traded businesses. https://t.co/7nQCoRihXQ ...