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Here's Why You Should Buy PepsiCo (PEP) Ahead of Q3 Earnings

PepsiCo Inc. PEP looks well-poised for growth in the third quarter of 2022, driven by the resilience and strength of global beverage and convenient food businesses. It expects to benefit from delivering convenience, variety and value proposition to customers through its brands. The company continues to gain from investments in brands, go-to-market systems, supply chains, manufacturing capacity and digital capabilities to build competitive advantages.

The company boasts a robust surprise trend. It reported the 16th straight quarter of a sales beat in second-quarter 2022. The company’s revenues and earnings beat the Zacks Consensus Estimate and improved year over year.

Net revenues improved 5.2% year over year, benefiting from volume growth and robust price/mix. Unit volume improved 3% and 6% year over year for the convenient food and beverage businesses, respectively. On an organic basis, revenues grew 13% year over year, driven by broad-based growth across categories and geographies. Earnings increased 8.1% year over year. In constant currency, core earnings were up 10% from the year-ago period, backed by the mitigation of inflationary pressures through cost-management and revenue-management initiatives.

PepsiCo’s shares have rallied 12.1% in the past year compared with the industry’s growth of 1.6%. The Zacks Rank #2 (Buy) stock’s performance also compares favorably against declines of 7.3% for the Consumer Staples sector and 16.4% for the S&P 500.

 

Zacks Investment Research
Zacks Investment Research


Image Source: Zacks Investment Research

 

Factors to Propel Growth

Strength in the global beverage has been significantly contributing to PepsiCo’s revenue growth in the past few quarters. On a year-over-year basis, organic revenues grew 8% for the beverage business in the second quarter. Gains in the beverage business were driven by market share growth in the liquid refreshment beverage category, with share gains in the carbonated soft drinks, Ready-to-Drink Tea and water categories.

In North America, the PBNA segment reported year-over-year organic revenue growth of 9% in the second quarter, backed by investments in innovation, pricing and execution. Many of its key brands performed exceptionally well in the quarter. The company continues to invest in its Zero Sugar products and other functional beverages in the carbonated and non-carbonated categories to offer more choices to consumers.

PepsiCo has the competitive advantage of selling both snacks and beverages, which are complementary food categories. On a year-over-year basis, organic revenues grew 17% for the convenient food business in the second quarter. In the second quarter, both Frito-Lay North America (“FLNA”) and Quaker Foods North America (“QFNA”) delivered robust organic revenue growth. The FLNA and QFNA businesses delivered revenue growth of 14% and 18%, respectively, in the second quarter, both on a reported and organic basis.

Growth in FLNA was driven by the continued shift of consumers toward simple pleasures that offer value, convenience and variety. The segment’s results were aided by market share growth in both macro-snack and savory snack categories. Revenues for the Quaker business benefited from market share gains in the rice and pasta, lite snacks, ready-to-eat cereal, and snack bar categories as it continued to capitalize on the elevated demand for tasty products that deliver convenience and value.

PEP is also positioned to gain from continued focus on driving greater efficiency and effectiveness by driving down costs and plowing back these savings to develop scale and core capabilities. In 2019, the company delivered in excess of $1 billion in productivity savings, keeping it on track with its goal of generating productivity savings of at least $1 billion annually through 2023. The company expects to achieve this productivity goal through savings generated from restructuring actions.

The actions are likely to position the company to further simplify, synchronize and automate processes; re-engineer the go-to-market and information systems; simplify the organization; and optimize its manufacturing and supply-chain footprint. As part of the restructuring actions, the company estimates incurring pre-tax charges of $2.5 billion through 2023 (with a cash portion of $1.6 billion). Savings from the productivity and restructuring plans should go a long way in driving the top line and margins.

Conclusion

Although supply-chain disruptions and inflationary labor, transportation and commodity costs remain dragging, we believe that the company’s strong portfolio of beverage and convenient food brands position it to bolster growth in the long run.

Other Stocks to Consider

We have highlighted some other top-ranked stocks from the broader Consumer Staples space, namely Coca-Cola KO, Fomento Economico Mexicano FMX and Constellation Brands STZ.

Coca-Cola, the Atlanta, GA-based global beverage giant, currently has a Zacks Rank #2. The company has an expected EPS growth rate of 6.4% for three to five years. Shares of KO have gained 8.6% in the past year.

You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here.

The Zacks Consensus Estimate for Coca-Cola’s current financial-year sales and earnings suggests growth of 9.8% and 6%, respectively, from the year-ago period’s reported figures. KO has a trailing four-quarter earnings surprise of 9.9%, on average.

Fomento Economico Mexicano, alias FEMSA, has exposure to various industries, including beverage, beer and retail, which gives it an edge over its competitors. It currently has a Zacks Rank #2. FMX has a trailing four-quarter earnings surprise of 18.9%, on average. Shares of FMX have lost 28.3% in the past year.

The Zacks Consensus Estimate for FEMSA’s current financial-year sales suggests growth of 11.3% from the year-ago period's reported figure. FMX has an expected EPS growth rate of 11.4% for three-five years.

Constellation Brands produces and markets beer, wine and spirits. It currently has a Zacks Rank #2. STZ has a trailing four-quarter earnings surprise of 4.4%, on average. Shares of STZ have risen 12.7% in the past year.

The Zacks Consensus Estimate for Constellation Brands’ current financial year’s sales and earnings suggests growth of 7.5% and 8.7%, respectively, from the year-ago period’s reported figures. STZ has an expected EPS growth rate of 10.8% for three-five years.


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Fomento Economico Mexicano S.A.B. de C.V. (FMX) : Free Stock Analysis Report
 
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Constellation Brands Inc (STZ) : Free Stock Analysis Report
 
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