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Can Pepsi (PEP) Keep the Earnings Streak Alive?

Zacks Equity Research

PepsiCo, Inc. (PEP) is set to report second-quarter 2014 results on Jul 23, before the market opens. Last quarter, it had delivered a positive earnings surprise of 10.67%.

In fact, the food and beverage company has delivered positive earnings surprises in the trailing four quarters. Let’s see how things are shaping up for this announcement.

Factors to Consider this Quarter

Strong performance by Pepsi’s snacks business is making up for the relatively weaker sales of its beverages.

Pepsi’s carbonated soft drinks (CSD) have been reporting sluggish volumes for the several quarters due to weak category headwinds. Growing health and wellness consciousness — consumers are particularly vigilant about the use of artificial sweeteners, high sugar content and related obesity concerns — are affecting CSD sales of Pepsi as well as other soft drink makers like The Coca-Cola Company (KO) and Dr Pepper Snapple Group, Inc. (DPS). We expect the downward trend of sales of CSD to continue in this quarter as well.

However, a strong snacks performance, improvement in Europe and sales gain in developing/emerging market should offset a softer beverage performance.

Currency headwinds and structural changes (mainly beverage re-franchising transaction in Vietnam) are expected to hurt second-quarter revenues by 4% and 15%, respectively. Currency will hurt second-quarter earnings by 5%. Moreover, both interest expense and tax rates are expected to be higher in the second quarter than the year-ago period — a headwind for earnings.

Earnings Whispers?

Our proven model does not conclusively show that Pepsi is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 or 3 for this to happen. That is not the case here, as you will see below.

Zacks ESP:  The Earnings ESP is 0.00%.

Zacks Rank: Pepsi’s Zacks Rank #2 (Buy) when combined with a 0.00% ESP makes surprise prediction difficult.

We caution against stocks with Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Other Stocks to Consider

A couple of stocks in the consumer staples sector that have both a positive Earnings ESP and a favorable Zacks Rank are:

Dr Pepper Snapple Group, with an Earnings ESP of +3.30% and a Zacks Rank #3 (Hold).

The Coca-Cola Company, with an Earnings ESP of +4.76% and a Zacks Rank #3.

The J.M. Smucker Co. (SJM) with an Earnings ESP of +1.43% and a Zacks Rank #3.

Read the Full Research Report on KO
Read the Full Research Report on DPS
Read the Full Research Report on PEP
Read the Full Research Report on SJM

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