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Factors Likely to Decide PepsiCo's (PEP) Fate in Q1 Earnings

Zacks Equity Research

PepsiCo, Inc. PEP is set to report first-quarter 2019 results on Apr 17, before the market opens. In the last reported quarter, the company’s earnings were in line with estimates. However, it surpassed estimates consecutively in the preceding 11 quarters. Thus, it has average positive earnings surprise of 3.2% for the trailing four quarters.

However, the Zacks Consensus Estimate for earnings in the first quarter is pegged at 92 cents per share, mirroring a 4.2% year-over-year decline. Notably, the consensus estimate has remained unchanged in the past 30 days. The Zacks Consensus Estimate for revenues for the first quarter is pegged at $12.7 billion, reflecting 0.7% growth from the prior-year quarter.

Pepsico, Inc. Price and EPS Surprise

 

Pepsico, Inc. Price and EPS Surprise | Pepsico, Inc. Quote

Let’s see how things are shaping prior to the earnings announcement.

Factors at Play

PepsiCo’s robust surprise trend is mainly attributable to strong performances in international divisions, propelled by higher revenue growth in developing and emerging markets. Further, strong net revenues and operating profit growth at Frito-Lay North America, along with sequential revenue gains in the North America Beverages segment, boosted results in the last few quarters. Backed by this, it reported sales beat in six of the last eight quarters.

Moreover, the company’s fundamental strength is evident from the solid brand portfolio, product innovation and strong snacks business. The complementary snacking and beverage portfolios provide competitive advantage due to benefits of cost leverage, capability sharing, cross-category promotions and other commercial benefits. The company’s strong and growing snacks business has largely offset the sluggish beverages business in the past several quarters. The Frito-Lay North American snacks business delivered consistent solid performance over the last four years. The segment is expected to continue delivering strong sales and profits as demand for savory snacks is rising.

In 2019, PepsiCo expects to further build on the momentum witnessed in 2018. The company plans to continue investing in capabilities that will position it for growth in the future. For the longer term, it projects organic revenue growth of 4-6%, with core operating margin expansion of 20-30 bps. Further, core constant-currency EPS is expected to increase in a high-single digit. Moreover, the company now estimates generating productivity savings of at least $1 billion annually through 2023 (an expansion from the prior target of $1 billion annual savings through 2019).

Driven by these positives, the PepsiCo stock has shown resilience lately. The stock has surged 4.8% in the past month, outperforming the industry’s growth of 2.1%. This reflects a positive sentiment on the stock ahead of the earnings release.

 



Despite strong end to 2018, PepsiCo outlined soft earnings guidance for 2019 due to ongoing investments to strengthen business and other factors. For 2019, the company estimates core constant-currency EPS to decline nearly 1%, owing to impacts of incremental investments to strengthen the business in 2019, higher effective tax rate guidance, and lapping of a number of asset sale and refranchising gains that occurred in 2018. Notably, effective tax rate is estimated to be nearly 21% in 2019 compared with 18.8% in 2018. It expects core earnings of $5.50 per share in 2019, reflecting a 3% decline from $5.66 reported in 2018.

Furthermore, unfavorable foreign exchange rates are likely to hurt the company’s reported revenues and EPS by nearly 2 percentage points in 2019, based on current rates.

Notably, the Zacks Consensus Estimate for earnings in 2019 is pegged at $5.50 per share, representing a 2.8% year-over-year decline. Further, revenue estimates for 2019 are pegged at $66.2 billion, reflecting 2.4% growth from the prior-year quarter.

Additionally, the industry-wide sluggishness in the carbonated soft-drinks category (CSD) sales continues to hurt the company’s performance. Consumers’ awareness regarding health and wellness, new taxes on sugar-sweetened beverages, and rising regulatory pressure affecting CSD sales have been major concerns for the industry.

Earnings Whisper

Here is what our quantitative model predicts:

PepsiCo does not have the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) — to increase the odds of an earnings beat.

Earnings ESP: PepsiCo has an Earnings ESP of +0.00%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: PepsiCo currently carries a Zacks Rank #4 (Sell). The combination of a negative Zacks Rank and ESP of 0.00% makes surprise prediction unlikely.

We caution against stocks with a Zacks Ranks #4 or 5 (Strong Sell) going into an earnings announcement, especially when the company is seeing a negative estimate revision.

Stocks to Consider

Here are some companies that you may want to consider as our model shows that these have the right combination of elements to post an earnings beat:

Sanderson Farms, Inc. SAFM has an Earnings ESP of +16.07% and a Zacks Rank #1. You can see the complete list of today’s Zacks #1 Rank stocks here.

Turning Point Brands, Inc. TPB has an Earnings ESP of +7.04% and a Zacks Rank #3.

Philip Morris International Inc. PM has an Earnings ESP of +0.29% and a Zacks Rank #3.

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