Quarterly Outlook
Fixed Income Outlook: Bonds Hit Reset. A New Equilibrium Emerges
Althea Spinozzi
Head of Fixed Income Strategy
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PepsiCo is an inflation winner and a wave of nuclear demand is coming
Peter Garnry
Chief Investment Strategist
Summary: PepsiCo delivered yesterday strong earnings indicating that some consumer companies are still thriving despite rising input costs and high inflation for the consumer. Operating margin was only down a bit in Q3 and was more than offset by higher than expected revenue growth to the extent that PepsiCo is lifting its organic revenue growth target for the current fiscal year. Cameco and Brookfield Renewable Partners announced yesterday the acquisition of the nuclear technology company Westinghouse Electric for $7.9bn in a sign that nuclear power is headed into its renaissance after decades of decline.
PepsiCo started Q3 earnings week with strong results
If investors expected margin compression and a downgrade to the outlook then PepsiCo’s Q3 earnings yesterday were not the answer they were looking for. The beverage and snack company increased its organic revenue growth this year to 12% from previously 10% as the company has been successful in raising prices with consumers apparently accepting it without lowering demand. PepsiCo only experienced a modest margin compression with its adjusted EBITDA margin declining to 19.4% from 20% in Q2. The share price is only down 0.5% this year underscoring its anti-inflation characteristics, something that is in high demand by investors.
While PepsiCo’s business seems robust at this point its valuation on EV/EBITDA is still 15% above the average since early 2004 and investors might change their perception on this given that future growth may not be as good as the years 2004-2011 and interest rates are still rising. The period 2012-2019 was one long desert walk of flat operating income and it was not until the pandemic and the subsequent rise in nominal growth that the business suddenly came back into growth mode. The question is whether growth has structurally changed for PepsiCo or it will down again. The soft drink and snack business is still facing headwinds from the trend in personal health.
Cameco CEO sees ‘wave’ of nuclear demand
We have just added our nuclear power theme basket to our performance tracking and already yesterday a major news item emerged about the industry. The Canadian uranium miner Cameco and Brookfield Renewable Partners are jointly acquiring Westinghouse Electric which is a player in the nuclear power industry in a deal worth $7.9bn. Westinghouse Electric makes technology that is used in around half of all the 440 nuclear reactors. Cameco is issuing shares worth $650nm to fund its part of the deal.
Cameco’s CEO said in an interview that they are seeing some of the best market fundamentals ever for nuclear energy sector. Given that Westinghouse Electric came out of bankruptcy four years tells everyone how much has changed for the industry. The CEO also says that they are seeing a ‘wave’ of demand coming driven by Europe, highlights specifically Eastern Europe, as Russia’s invasion of Ukraine has been a game changer. The IEA (International Energy Agency) has stated that nuclear power generation must double by 2050 in order to meet net zero carbon emission in the global economy. That means 2.5% annualized growth in nuclear power generation. If we factor in the replacement of old nuclear power plants then growth is likely to be 5-6% annualized over the next 28 years.
According to the World Nuclear Association, there are 55 reactors under construction (90 if planned reactors are taking into consideration) with the most of these reactors being built in Asia supplementing the existing 440 nuclear power plants. This year nuclear power plants will produce 10% of the world’s electricity.
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