U.S. Markets close in 2 hrs

Will Snacks Category Boost PepsiCo's (PEP) Earnings in Q2?

Zacks Equity Research

PepsiCo, Inc. PEP is set to report second-quarter 2019 results on Jul 9, before the market opens. In the last reported quarter, the company delivered a positive earnings surprise of 5.4%.

Notably, PepsiCo has reported positive earnings surprise in 12 of the last 13 quarters and sales beat in seven of the last nine quarters. It has an average trailing four-quarter beat of 3.5%.

Pepsico, Inc. Price and EPS Surprise

Pepsico, Inc. Price and EPS Surprise

Pepsico, Inc. price-eps-surprise | Pepsico, Inc. Quote

However, the Zacks Consensus Estimate for second-quarter earnings is pegged at $1.49 per share, implying a 7.5% decline from the year-earlier quarter's reported figure. Notably, the consensus mark has moved down by a penny over the past seven days. For quarterly revenues, the Zacks Consensus Estimate stands at $16.4 billion, suggesting 1.9% growth from the prior-year quarter reported number.

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 have boosted results in the last few quarters. Backed by these trends, the company is likely to continue with its impressive top- and bottom-line performances in the to-be-reported quarter.

Moreover, the company’s fundamental strength is evident from its solid brand portfolio, product innovation and strong snacks business. PepsiCo is also focusing on driving greater efficiency and effectiveness by lowering costs and plowing back these savings to develop scale and core capabilities. This, in turn, is likely to boost margins and the bottom line.

PepsiCo has the competitive advantage of selling both snacks and beverages, which are complementary food categories. The complementary portfolio results in cost leverage, capability sharing, cross-category promotions and other commercial benefits.

With popular brands like Doritos, Cheetos and Lay’s, the company holds the number one position in the global snacks market. Just over half of PepsiCo's sales come from snacks, while the remainder is contributed by beverages. The Frito-Lay North American snacks business has delivered consistent solid performance over the last four years, offsetting the sluggishness in the beverages business. This segment is expected to continue delivering strong sales and profits as clear from the rising demand for savory snacks.

Furthermore, PepsiCo generates a significant part of its revenues outside the United States (38% of 2018 net revenues). The company is expanding in developing markets like Russia, Mexico, China, India, Brazil and Africa through tailored distribution models as well as by offering locally relevant innovation and value-added products. In Mexico and India, PepsiCo has a massive expansion plan in place over the next five years. Continued growth in these markets should contribute meaningfully to top-line growth in the second quarter.

Expectations for 2019

For 2019, the company estimates organic revenue growth of 4% compared with 3.7% growth in 2018. For the longer term, it projects organic revenue growth of 4-6%.

However, unfavorable impacts of ongoing investments to strengthen business, higher tax rate, and the absence of asset sale and refranchising gains that occurred in 2018 are likely to weigh on PepsiCo’s earnings in 2019. Further, adverse currency rates are likely to hurt the company’s sales and earnings this year.

Nevertheless, we expect all aforementioned growth drivers to offset these minor hurdles and help the company to sustain its robust top- and bottom-line beat trend in the second quarter.

Earnings Whisper

Here is what our quantitative model predicts:

PepsiCo has 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 +0.17%. 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 #3, which combined with a positive ESP increases the chances of an earnings beat.

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:

Kimberly-Clark Corporation KMB has an Earnings ESP of +0.10% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

The Procter & Gamble Company PG has an Earnings ESP of +0.84% and a Zacks Rank #2.

Philip Morris International Inc. PM has an Earnings ESP of +0.54% and a Zacks Rank #3.

The Hottest Tech Mega-Trend of All

Last year, it generated $8 billion in global revenues. By 2020, it's predicted to blast through the roof to $47 billion. Famed investor Mark Cuban says it will produce ""the world's first trillionaires,"" but that should still leave plenty of money for regular investors who make the right trades early.

See Zacks' 3 Best Stocks to Play This Trend >>