Pepsi-Cola Products Philippines, Inc. (PSE: PIP)

Pepsi-Cola Products Philippines, Inc. (PIP, the Company) is majority owned by foreigners. The Company is a licensed bottler of PepsiCo, Inc. and manufactures carbonated soft drinks (CSD) and non-carbonated beverages (NCB). The Company’s well-known brands are Pespis-Cola, 7Up, Mountain Dew, Mirinda, Mug, Gatorade, Tropicana/Twister, Lipton, Sting, and Propel. Mountain Dew is PIP’s strongest CSD flavor while Gatorade is their forefront on the NCB market.

Below is PIP’s revenue mix:

PIP2

The Company’s drive on growing its NCB products is their response to the increasing health conscious consumers.

For the year ended 2012, PIP displayed a 14% increase in revenues and an impressive jump in net income of 192%. The huge disconnect between revenues and net income increase is best explained by decreasing raw material costs which is explained by low sugar prices in 2012. Raw sugar averaged P1,346.22 in 2012 while P1,863.98 in 2011.[1] PIP1

The combination of 14% increase in revenues and 4% increase in operating profit margin contributed to the huge jump in the Company’s earnings. A favorable development for PIP and all businesses that has majority of their costs tied to sugar costs is the expected decline in sugar prices due to the tariff rate reduction. [2]

The decline of tariff rates on sugar exports from 38% in 2011 to 28% in 2012 dragged sugar prices low enough for PIP to generate a jump in earnings. Therefore, we should expect PIP to present earnings growth from 2013 to 2015 even though the Company reports flat revenue during the same span of time.


Source:

  1. Raw Sugar and Molasses Millsite Prices, http://www.sra.gov.ph/wp-content/uploads/downloads/2012/12/MILLSITE-PRICES-RAW-SUGAR-AND-MOLASSES0001.pdf
  2. Executive order 892, http://www.tariffcommission.gov.ph/eo_892.htm

Disclaimer: I do not claim to be an expert and nothing I say should be taken as a recommendation to buy or sell. Read more in the ABOUT page.

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5 thoughts on “Pepsi-Cola Products Philippines, Inc. (PSE: PIP)

  1. Hi Renzie,

    Do you have estimates on how much Sugar prices will fall in the Philippines given this decline in tariffs rates? What portion of PIP’s ‘Cost of Sales’ refers to sugar prices?

    Thanks.

    Duane

    Reply
    • Hello Duane,

      good question. The bad news is that PIP’s cost of sales is not broken down enough to show sugar costs. In note 15 of PIP’s financial statements, you will see Materials and supply costs. These costs includes concentrates (secret recipe from the PepsiCo) and sugar costs. Its impossible to determine the impact of sugar costs decline in the margins of the company with the information available.

      Currently, sugar from thailand has a price of P900 in the Phil. Should sugar go near that level which i expect in 2015, it would increase the margins of PIP (assuming all else constant). exact amount of the impact? i do not know but for sure PIP’s profit margin will not go below 6% (based on 2Q report). If you are attempting to forecast PIP’s earnings, you are better off by forecasting volumes sold determine the revenue and multiply by profit margin or simply assume 10% increase in revenues and multiply it by the profit margin. 10% growth in revenues is attainable based on recent quarterly reports.

      Regards,

      Renzie

      Reply
      • Great advise.

        I tried forecasting PIP’s EPS for 2015, and got an impressive P0.72 per share (triple from P0.24 in 2012). Do you think this figure is reasonable? My assumptions…

        1) From your advise, sugar prices in the Philippines will fall to the same level as our ASEAN neighbors or P900 per LKg in 2015 (from about P1,700 per LKg in Aug 2012).

        What I did was to do a simple regression to estimate the impact of sugar prices to the company’s cost of sales since a breakdown wasn’t given. My estimate was that ‘cost of sales/revenue’ will go down from 63% today to 56% in 2015 given the drop in sugar prices. The regression was done by measuring the relationship of sugar prices with the company’s ‘cost of sales/revenue’ for the last 10 quarters. After receiving the formula, I just entered sugar price of P900 and its estimate was a drop to 56%.

        2) PIP is spending about P4 billion to double its distribution network. According to Bloomberg, analysts estimate PIP’s revenue growth for 2013 and 2014 to be 12.5%, 11.5%, respectively. I used these estimates and assumed revenue growth of 10% for 2015.

        Duane

  2. Hi duane,

    I think you have a better forecasting model than mine duane. Mine declined to 52%.

    It never occurred to me to use linear regression in forecasting for stock investing purposes. I’ll use that someday. thanks for adding my knowledge.:)

    Regards,

    Renzie

    Reply
    • No problem.

      Having your model forecast 52% (more optimistic for PIP), just goes to show how wonderful this investment could be. Tripling EPS in three years is great. If PIP would only maintain its PE ratio at the same level, the stock would triple by 2015. Great job for spotting this!

      Reply

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