Under The Spotlight: Alphabet And Pepsi
Alphabet (GOOGL, GOOG) is a collection of businesses — the largest of which is Google — which represents two segments: Google Services and Google Cloud. All non-Google businesses collectively are known as Other Bets. The Other Bets include earlier stage technologies managed with the discipline and rigor needed to deliver long-term returns.
Global Brand
The very first web page was created in 1990 and by late 1992, there were a mere 26 websites in the world. However, just a few years later, web pages numbered in the tens of millions and searching for information became challenging. To address that challenge, Stanford University graduate students, Larry Page and Sergey Brin, built a search engine from their dorm room that used links to determine the importance of individual web pages. By 1998, they formalized their work and named their search engine Google, a play on the word, googol, which is the mathematical expression for a 1 followed by 100 zeroes. The name reflects the immense volume of information that exists and Google’s mission to organize the world’s information and make it universally accessible and useful.
Google’s strong global brand is one of the most recognized in the world as millions of people use Google’s services every day. Search results are no longer just web pages. They include images, videos, books, maps and more. In 2006, Google acquired YouTube, which lets billions of people watch and share original videos and professional content. With searches increasingly coming from mobile devices such as smartphones, Google developed Android, a mobile operating system that allows open interoperation across carriers. To enable faster searches, Google launched a web browser called Google Chrome which makes it easier for folks to use their favorite Google products like Google Maps, Gmail, Google Photos, Google Play, Google Docs and Google Translate. Google's core products such as Search, Android, Maps, Chrome, YouTube, Google Play and Gmail each have over one billion monthly active users. In August 2015, Google created a new public holding company called Alphabet. Alphabet is a collection of businesses, the largest of which is Google. Google consists of the previously described Google Services and Google Cloud. Google was a company built in the cloud and the company continues to invest in infrastructure, security, data management, analytics and artificial intelligence. Alphabet also includes businesses known as the Other Bets which are currently unprofitable but making important strides in their various industries such as driverless cars, healthcare and other innovative ventures.
Outstanding Growth
Most of Google’s products and services are free for users. The majority of the company’s $182 billion in revenue in 2020 came from advertising as Google’s proprietary technology matches ads to the content of the pages on which they appear. Advertisers pay the company either when a user clicks on one of its ads or based on the number of times their ads appear on the Google Network. Thanks to the growth of the digital economy, Google has provided outstanding growth with revenues and earnings more than doubling over the last five years. In 2020, Alphabet reported fourth quarter revenues rose 23% to $56.9 billion with net income jumping 43% to $15.2 billion and EPS up 45% to $22.30. For the full 2020 year, revenues rose 13% to $182.5 billion with net income up 17% to $40.3 billion and EPS up 19% to $58.61. Return on shareholders’ equity for the year was a solid 18.1%. This strong performance was driven by Search and YouTube as consumer and business activity recovered from earlier in the year. Google advertising revenue increased 22% in the fourth quarter, including 46% growth in YouTube ads. During the pandemic, consumers flocked to online shopping and advertisers followed them, increasing their advertising in a digital world. Google Cloud revenues increased 46% in 2020 to $13.1 billion. The company ended the year with a $30 billion backlog for Google Cloud as companies are increasingly shifting their business to the cloud, including Google’s recent deals with Ford, BNY Mellon and Twitter.
Fortress Balance Sheet
Alphabet’s free cash flow during the year increased 38% to $42.8 billion with the company repurchasing $31.1 billion of its common shares during the year. Alphabet ended the year with a fortress balance sheet with more than $157 billion in cash and investments, $25 billion in long-term debt and liabilities and $222.5 billion in shareholders’ equity. Long-term investors should google Alphabet, a HI-quality company with a strong global brand, outstanding growth and robust cash flows. Buy.
PepsiCo (PEP) products are enjoyed by consumers more than one billion times a day in more than 200 countries and territories around the world. PepsiCo generated more than $70 billion in net revenue in 2020, driven by a complementary food and beverage portfolio that includes Frito-Lay, Gatorade, Pepsi-Cola, Quaker, Tropicana and SodaStream. PepsiCo's product portfolio includes a wide range of enjoyable foods and beverages, including 23 brands that generate more than $1 billion each in estimated annual retail sales.
Strong Brands
In the late 1800’s Caleb Bradham, a North Carolina pharmacist, created Pepsi-Cola. Several decades later in the 1930’s, Fritos brand corn chips and Lay’s brand potato chips started appearing in chip bowls. In 1965, the two firms completed a tasty merger adding salty snack foods to Pepsi’s growing beverage business. Today, PepsiCo’s revenues top $70 billion with snacks accounting for 55% of sales and beverages 45% of revenues. Hundreds of other great brands have since been launched and acquired. PepsiCo’s product portfolio today consists of a panoply of strong brands which appeal to consumers of all ages. Twenty-three of PepsiCo’s brands each generate retail sales of more than a billion dollars annually. Pepsi-Cola, Gatorade, Tropicana Juice, Lay’s Potato Chips, Diet Pepsi, Doritos, Cheetos, Fritos, Quaker, Aquafina, Sierra Mist and Mountain Dew rank among the best-selling brands in U.S. supermarkets. As consumer tastes shift toward healthier foods and beverages, PepsiCo has responded with baked snacks with lower fat content, such as Stacy’s Pita Chips and Baked Lay’s Potato Chips, and beverages with fewer or zero calories and less added sugar, such as SoBe Lifewater, bubly, Propel and Gatorade Zero.
2020 Results
PepsiCo announced fourth quarter revenues popped 9% higher to $22.5 billion with net income up 5% to $1.8 billion and EPS up 6% to $1.33. PepsiCo ended the year on a strong note with the global beverage business having accelerated while the global snacks and food business remained resilient. For the full year 2020, revenues rose 5% to $70.4 billion with net income down 3% to $7.1 billion and EPS down 2% to $5.12 reflecting increased COVID-19 related costs. In 2020, return on shareholders’ equity expanded to a tantalizing 52.9%.
Bubbly Cash Flow
Free cash flow increased a bubbly 18% to $6.4 billion during the year with the company paying $5.5 billion in dividends and repurchasing $2 billion of its common stock. Capital allocation strategies remain unchanged for the long term. PepsiCo’s priority is first to reinvest in its business to drive growth and productivity—then to pay its growing dividend and strengthen its portfolio with bolt-on mergers and acquisitions—followed by share repurchases while maintaining access to debt capital markets at attractive rates. PepsiCo recently announced a 5% increase in the dividend payment to an annualized $4.30 per share, which represents the 49th consecutive year of dividend increases. The current dividend yields a yummy 3.2%. The company is not planning any large merger and acquisition activity or significant share repurchases in 2021 as management focuses on debt repayment for recent acquisitions.
Earnings Outlook For 2021
For 2021 PepsiCo expects a mid single-digit increase in organic revenue growth and a high single digit increase in core constant currency EPS growth. Management assumes that vaccination efforts will accelerate during the year leading to gradual improvement in consumer mobility to venues that sell PepsiCo products. At the same time, PepsiCo expects to sustain greater ecommerce activity due to continued remote work arrangements. PepsiCo’s long-term target for organic sales growth is 4%-6%. Operating margins are expected to expand 20 to 30 basis points each year thanks to further automation and digitalization. This should lead to high single-digit core constant currency earnings per share growth over time. Long-term investors should consider popping PepsiCo into their portfolio. PepsiCo is a HI-quality company with multiple strong billion dollar brands, bubbly cash flows, high profitability and a long-term track record of delivering sustainable sales, earnings and dividend growth. Buy.