Why Is PepsiCo (PEP) Up 4.1% Since Last Earnings Report?
It has been about a month since the last earnings report for PepsiCo (PEP). Shares have added about 4.1% 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 drivers.
PepsiCo Tops Q3 Earnings & Sales Estimates, Raises View
PepsiCo has reported third-quarter 2022 results, wherein revenues and earnings surpassed the Zacks Consensus Estimate and our estimate. The top and bottom lines also 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 third-quarter core EPS of $1.97 beat the Zacks Consensus Estimate of $1.85 and our estimate of $1.81. Core EPS also increased 10.1% year over year. In constant currency, core earnings were up 14% 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 $1.95 declined 22% year over year in the quarter. Adverse currency rates impacted EPS by 3% in the quarter.
Net revenues of $21,971 million improved 8.8% year over year and surpassed the Zacks Consensus Estimate of $20,878 million and our estimate of $20,735.1 million. Revenues benefited from robust price/mix in the reported quarter. Unit volume declined 1.5% year over year for the convenient food business, while improving 3% for the beverage business. Foreign currency impacted revenues by 3%.
On an organic basis, revenues grew 16% year over year, driven by broad-based growth across categories and geographies. This marked the fourth straight quarter of double-digit organic revenue growth for the company. Consolidated organic volume was down 1%, while effective net pricing improved 17% in the third 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 12% for the beverage business and 20% for the convenient food business. Region-wise, organic revenues improved 16% each for the North America and international businesses.
On a consolidated basis, the reported gross profit increased 8% year over year to $11,663 million. Core gross profit rose 8.4% year over year to $11,729 million. The reported gross margin contracted 40 basis points (bps), while the core gross margin declined 20 bps, driven by the impacts of ongoing inflationary pressures.
The reported operating income of $3,353 million increased 6.1% year over year. Core operating income rose 10.9% year over year to $3,595 million and core constant-currency operating income improved 14%. The reported operating margin declined 30 bps to 15.3% from 15.6% 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 30 bps, driven by strong revenue growth and gains from cost-management initiatives, offset by inflationary pressures on operating expenses.
Segmental Details
The company witnessed revenue growth across all segments. Organic revenues climbed for all segments. Revenues, on a reported basis, improved 20% in FLNA, 15% in QFNA, 4% in PBNA, 20% in Latin America, 1% in Europe, 4% in AMESA and 3% in APAC. Organic revenues increased 20% for FLNA, 16% for QFNA, 13% for PBNA, 22% for Latin America, 15% for Europe, 17% for AMESA and 8% for APAC. Operating profit (on a reported basis) increased 17% for FLNA, 15% for QFNA, 1% for PBNA, 18% for Latin America and 28% for Europe. Yet, it declined 14% for AMESA and 1% for APAC.
Financials
The company ended third-quarter 2022 with cash and cash equivalents of $6,415 million, long-term debt of $36,136 million, and shareholders’ equity (excluding non-controlling interest) of $18,977 million. Net cash from operating activities was $6,306 million as of Sep 3, 2022, compared with $6,634 million as of Sep 4, 2021.
Outlook
Given the year-to-date performance, PepsiCo has raised the revenue and earnings guidance for 2022. The company expects organic revenue growth of 12% for 2022 compared with 10% growth mentioned earlier. It anticipates core constant-currency earnings per share to increase 10% from a year ago compared with 8% growth mentioned earlier. 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 impacts of the extra week.
PEP expects currency headwinds to hurt revenues and core earnings per share by 2.5 percentage points in 2022, based on the current rates. Earlier, the company had anticipated a 2-percentage-point impact from currency headwinds. The company continues to expect a core effective tax rate of 20%.
Based on the above assumption, PepsiCo expects its core earnings per share to be $6.73 for 2022 compared with the $6.63 mentioned earlier. This suggests a 7.5% increase (6% increase stated earlier) from the core EPS of $6.26 reported in 2021. PepsiCo remains committed to rewarding shareholders through dividends and share buybacks. The company anticipates total cash returns to shareholders of $7.7 million for 2022, including $6.2 million of cash dividends and $1.5 billion of share repurchases.
How Have Estimates Been Moving Since Then?
It turns out, estimates revision have trended downward during the past month.
VGM Scores
At this time, PepsiCo has a nice Growth Score of B, a grade with the same score on the momentum front. Charting a somewhat similar path, 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 downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, PepsiCo has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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