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PepsiCo (PEP) Up 3.4% Since Last Earnings Report: Can It Continue?

·6 min read

A month has gone by since the last earnings report for PepsiCo (PEP). Shares have added about 3.4% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is PepsiCo due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important catalysts.

PepsiCo Tops on Q2 Earnings & Revenues, Raises View

PepsiCo has reported second-quarter 2022 results, wherein revenues and earnings surpassed the Zacks Consensus Estimate and improved year over year. The company continued to benefit from investments in brands, go-to-market systems, supply chains, manufacturing capacity and digital capabilities to build competitive advantages. It also gained from the resilience and strength in the global beverage and convenient food businesses.

PepsiCo’s second-quarter core EPS of $1.86 beat the Zacks Consensus Estimate of $1.72 and 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. The company’s reported EPS of $1.03 declined 39.4% year over year in the quarter. Adverse currency rates impacted EPS by 2% in the quarter.

Net revenues of $20,225 million improved 5.2% year over year and surpassed the Zacks Consensus Estimate of $19,767 million. Revenues benefited from volume growth and robust price/mix in the reported quarter. Unit volume improved 3% and 6% year over year for the convenient food and beverage businesses, respectively. Foreign currency impacted revenues by 3%.

On an organic basis, revenues grew 13% year over year, driven by broad-based growth across categories and geographies. Consolidated organic volume was up 1% and effective net pricing improved 12% in the second quarter. Pricing gains were driven by strong realized prices across all segments.

Improvements across categories resulted from accelerated growth in the global beverage and convenient food businesses, reflecting strength in its diversified portfolio. On a year-over-year basis, organic revenues grew 8% for the beverage business and 17% for the convenient food business. Region-wise, organic revenues improved 11% for the North America business and 15% for the international business.

On a consolidated basis, the reported gross profit increased 4.6% year over year to $10,810 million. Core gross profit rose 4.3% year over year to $10,789 million. The reported gross margin contracted 35 basis points (bps), while the core gross margin declined 46 bps, driven by the impacts of ongoing inflationary pressures.

The reported operating income of $2,077 million declined 33.6% year over year. Core operating income rose 7.5% year over year to $3,408 million and core constant-currency operating income improved 10%. The reported operating margin declined by a significant 602 bps to 10.3% from 16.2% in the year-ago quarter due to higher SG&A expenses and pre-tax impairment charges related to intangible assets, offset by gains from the Juice transaction. Meanwhile, the core operating margin expanded 36 bps, driven by gains from the cost management initiatives, offset by inflationary pressures on operating expenses.

Segment Details

On a segmental basis, the company witnessed revenue growth across all segments, except for PBNA and Europe. Organic revenues ascended for all segments. Revenues, on a reported basis, improved 14% in FLNA, 17% in QFNA, 23% in Latin America, 6% in AMESA and 3% in APAC. Meanwhile, revenues, on a reported basis, declined 1% in PBNA and 8% in Europe. Organic revenues increased 14% for FLNA, 18% for QFNA, 9% for PBNA, 22% for Latin America, 9% for Europe, 23% for AMESA and 13% for APAC.
 
Operating profit (on a reported basis) increased 5% each for FLNA and QFNA segments, 18% for Latin America, 14% for AMESA and 7% for APAC. Yet, it declined 20% for PBNA and 297% for Europe.

Financials

The company ended second-quarter 2022 with cash and cash equivalents of $5,405 million, long-term debt of $33,247 million, and shareholders’ equity (excluding non-controlling interest) of $18,553 million. Net cash from operating activities was $1,881 million as of Jun 11, 2022, compared with $2,340 million as of Jun 12, 2021.

Outlook

Given the year-to-date performance, PepsiCo has raised the revenue guidance for 2022. The company expects organic revenue growth of 10% for 2022 compared with 8% growth mentioned earlier. It continues to anticipate core constant-currency earnings per share to increase 8% from a year ago. The company notes that it will have the 53rd week in 2022 for the North America business, which reports on a calendar basis. The company’s organic revenue growth outlook excludes the impact of the extra week.

Based on the above assumption, PepsiCo has reiterated its core earnings per share view of $6.63 for 2022, suggesting a 6% increase from $6.26 reported in 2021. PEP expects currency headwinds to hurt revenues and core earnings per share by 2 percentage points in 2022, based on the current rates. The company continues to expect a core effective tax rate of 20%.

PepsiCo remains committed to rewarding shareholders through dividends and share buybacks. The company anticipates total cash returns to shareholders of $7.7 million, including $6.2 million of cash dividends and $1.5 billion of share repurchases.

How Have Estimates Been Moving Since Then?

It turns out, fresh estimates have trended upward during the past month.

VGM Scores

Currently, PepsiCo has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending upward for the stock, and the magnitude of these revisions has been net zero. It comes with little surprise PepsiCo has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.


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