The Pepsi (NASDAQ: PEP) 3rd quarter earnings release yesterday was the absolute definition of a consumer company utterly lost with no semblance of a long-term strategic vision.
To the sheeple of Wall Street analysts parsing the black-and-white financial statements, it’s a company that superfluously looks like it’s chugging right along with reasonable revenue growth of 3%, nothing out of the park but good enough to continue to pay out its reasonably attractive dividend yield of 3.3%.
However, any attempt to dig a bit deeper and really listen to what management is saying should leave investors with an uneasy feeling of absolute bafflement. These are the brands that the management team believes should inspire investors about the bright future ahead: Pepsi, Lays, and Gatorade.
This is what innovation looks like at Pepsi (word for word from their conference call):
Outgoing CEO Indra Nooyi was absolutely gushing on the conference call about how transformational their recent $3.2 billion SodaStream acquisition would be for the company. SodaStream is a kitchen counter gimmick that will undoubtedly go the way of the George Foreman Grill (a far more useful product).
Pepsi’s management team has been engaging in this kind of self-congratulatory brand pumping for years on every conference call, however, this Q3 call proved to be a very special one indeed.
Vivien Azer from sell-side firm Cowen & Co asked a rather innocuous question if Pepsi was thinking about beverage products with non-psychoactive cannabis (CBD); the CFO Hugh Johnston chimed in stating they had ‘no plans to do anything at this point’. The stock preceded to sell off on the back of those comments ending the day down 1.8%. A consumer company simply can’t be this clueless on cannabis.
Johnston proceeded to then quickly walk back his words on CNBC later that day stating ‘we’ll look at cannabis critically, not prepared to share plans’… totally believable pivot — they’ve got this.
Large multinational consumer companies have had their hands forced on the cannabis file, the market will punish them if they are seen to be flatfooted — they simply can’t let Constellation’s (NYSE: STZ) monster $5 billion bet on cannabis go unchallenged. Headstarts matter a lot in consumer products and right now Constellation is much farther ahead than any of its peers.
We’ve been very bullish on the cannabis sector since the Constellation investment. It has spurred a global consumer arms race to come up with some product, any product to meet prospective future millennial demand. More M&A deals will follow, as there are a plethora of other no-growth consumer companies looking to regain even a minimal amount of lustre for their portfolio of broken ageing brands.
Our conviction call holding in the Canadian cannabis sector is Aphria (TSE: APH). It ticks the right boxes for any cautious executive team doing their due diligence on the sector: tested management team, lowest cost producer, and a big valuation discount to peers.
Pepsi like many other consumer brands have significantly lagged the S&P 500 benchmark over the last 5 years — cannabis is one of the few genuine pathways to reverse the trend.
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