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Why Is PepsiCo (PEP) Down 5.3% Since Last Earnings Report?

Zacks Equity Research
·5 min read

It has been about a month since the last earnings report for PepsiCo (PEP). Shares have lost about 5.3% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is PepsiCo due for a breakout? 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 Q3 Earnings & Sales Top Estimates

PepsiCo has reported strong third-quarter 2020 results, wherein earnings and sales surpassed estimates and improved year over year as well. Despite continued challenges related to the coronavirus pandemic, the company’s robust third quarter performance was backed by its resilience and strength in the global snacks and foods business as well as improvement in the beverage category.

The company also gained from its strong portfolio of brands, a responsive supply chain and flexible go-to-market systems, which helped maintain continued supplies amid the coronavirus pandemic.

Quarter in Detail

PepsiCo’s third-quarter core EPS of $1.66 beat the Zacks Consensus Estimate of $1.48 and also increased 6.4% year over year. In constant currency, core earnings were up 9% from the year-ago period. The company’s reported EPS of $1.65 rose 10% year over year.

Net revenues of $18,091 million improved 5.3% year over year and also surpassed the Zacks Consensus Estimate of $17,288 million. On an organic basis, revenues grew 4.2% year over year. Foreign currency impacted revenues and earnings by 2% and 3%, respectively, in the third quarter. Revenues benefited from continued momentum in snacking category as well as gains in beverage business.

Revenues also reflected gains from strong volume growth and robust pricing during the quarter. Total volume increased 2% in the reported quarter. Notably, organic volume for snacks/food business improved 3% while it was up 1% for the beverage business. Meanwhile, net pricing climbed 3% in the third quarter, driven by strong pricing across almost all segments, except AMESA.

On a consolidated basis, reported gross margin contracted 32 basis points (bps) while core gross margin declined 60 bps. Reported operating margin expanded 3 bps while core operating margin declined 40 bps.

Segment Details

On a segmental basis, the company witnessed revenue growth across all segments, except Latin America. Organic revenues also ascended for all segments, except AMESA.

Reported revenues bettered 7% in FLNA, 3% in Europe, 31% in AMESA, 15% in APAC and 6% each in QFNA and PBNA segments whereas the metric declined 13% in Latin America. Organic revenues increased 6% each at FLNA and QFNA segments while the same was up 3% for PBNA, 1% for Latin America, 7% for Europe and 5% for APAC. However, organic revenues dipped 2% at AMESA.

Operating profit (on a reported basis) grew 5% for FLNA, 15% for QFNA, 9% for PBNA and 5% for Europe. However, it declined 10% for Latin America, 9% for AMESA and 1.5% for APAC.

Financials

The company ended the third quarter with cash and cash equivalents of $9,094 million, long-term debt of $37,879 million and shareholders’ equity (excluding non-controlling interest) of $13,483 million.

Net cash provided by operating activities was $6,123 million as of Sep 5, 2020 compared with $5,063 million as of Sep 7, 2019.

Outlook

Based on the year-to-date performance and evolving business conditions, the company updated its guidance for 2020. It predicts organic revenue growth of 4% for the year with core earnings of $5.50 per share. It reported core earnings per share of $5.53 in 2019.

Further, it expects to maintain a strong balance sheet, increased cash generation and ample liquidity to invest in its business and reward its shareholders. It anticipates generating $10 million of cash from operations and about $6 million of free cash flow. Capital expenditure for 2020 is estimated to be nearly $4 million.

For 2020, the company plans to return $7.5 billion of cash to its shareholders, comprising $5.5 billion of dividends and $2 billion of share repurchases. It expects core effective tax rate of 21%.However, the company expects currency headwinds to hurt its revenues and core earnings per share (EPS) by 2 percentage points in 2020, based on the current rates.

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

At this time, PepsiCo has a great Growth Score of A, though it is lagging a bit on the Momentum Score front with a B. 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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