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Bear of the Day

Pepsico (PEP - Analyst Report) may be riding a string of seven straight positive earnings surprises, but analysts have slashed their estimates. PEP is the Bear of the Day as a Zacks Rank #4 (Sell) stock.

Beating the Number

A sign of strong management is the ability to communicate reasonable expectations to Wall Street. PEP has done just that over the last two years as the company has converted on 7 straight earnings reports.

Another positive aspect PEP has going for it is the sales growth. While minimal, there is still growth on a year over year basis in each of the last two quarters. The soft drink market is relatively mature, so any growth from a huge company like PEP is good growth.

Company Description

PepsiCo operates as a food and beverage company. They make and sell soft drinks and snacks via numerous brands. PEP was founded in 1898 and is headquartered in Purchase, New York.

Earnings History

As mentioned already, the company has a solid history of beating the number. This is what long term investors like, but they also wanted to be rewarded following the beat.

Over the last seven quarters, the stock traded higher only four times in the session following the report. The largest move by the stock was a 4.9% move after the March 2013 quarter was reported in April. The December 2011 quarter saw the stock move lower by 4.2% even after the company beat expectations by $0.02. Fizz Coming From SODA

There have been rumors that PEP or KO might be looking to buy smaller rival SODA. This idea propelled the stock price for SODA to bubble up to new highs, but not so for the two major players in the market.

The CEO of PEP shot down the notion of an acquisition noting that it would be news to her if the deal happened.

Earnings Estimates Sink

Being lowered to a Rank #4 (Sell) implies that earnings estimates have moved down. That is the case recently with PEP estimates for 2013 and 2014.

June 2013 saw the Zacks Consensus Estimate at $4.40, right were it had been for much of the year. But analysts dropped their estimates down to $4.35 in July. That is a relatively big move for an estimate that prior to that had a two cent range all year.

Similarly, estimates for 2014 moved from $4.78 in June to $4.74. Again the move is big on a relative basis.

Valuation

The valuation picture for is a mixed one. The trailing and forward PE show the company trading at a discount to the industry averages. The price to book multiple of 5.7x is rather large on an absolute basis, but below the 7.5x industry average. The real concern comes when you look at growth rates for revenue and earnings and you can see PEP is not quite flat, but nowhere near the industry average. One stat that isn't sweet or refreshing is the net margin comparison. PEP has a 10.1% net margin, while the industry average 19.5%.

The Chart

The price and consensus chart for PEP is a strange one. I know there is a lot of coverage for the stock, but it appears that the stock has risen dramatically based solely on year over year growth and estimates look to be tailing off. As a defensive investors dream stock, PEP probably found a lot of support from those investors. Now comes the question if the stock can keep fizzing higher without spilling over the rim.

Brian Bolan is a Stock Strategist for Zacks.com. He is the Editor in charge of the Zacks Home Run Investor service, a Buy and Hold service where he recommends the stocks in the portfolio.

Brian is also the editor of Breakout Growth Trader a trading service that focuses on small cap stocks and also carries a risk limiting strategy. Subscribers get daily emails along with buy, and sell alerts.

Follow Brian Bolan on twitter at @BBolan1

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