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Why Is Pepsi (PEP) Up 4.3% Since the Last Earnings Report?
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It has been about a month since the last earnings report for Pepsico, Inc. (PEP - Free Report) . Shares have added about 4.3% in that time frame, outperforming the market.
Will the recent positive trend continue leading up to the stock’s next earnings release, or is it 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.
Pepsi Tops Q1 Earnings, Revenues on Price Gains
Earnings
PepsiCo’s first-quarter 2017 (ending Mar 25), core earnings per share (EPS) of $0.94 beat the Zacks Consensus Estimate of $0.91 by 3.3%.
Earnings grew 5.6% year over year despite adverse impact of currency headwinds on sales. Also, currency hurt earnings by 2%. In constant currency terms, adjusted earnings grew 7% on decent sales growth.
Notably, core earnings exclude restructuring and impairment charges and commodity mark-to-market net impact. Reported earnings came in at $0.91 per share, up 43% year over year, primarily reflecting the impact of the year-ago charge related to the transaction with Tingy.
Sales
Total sales improved 1.6% year over year to $12.05 billion. Foreign exchange (Fx) hurt revenue growth by 1%. Reported revenues surpassed the Zacks Consensus Estimate of $11.97 billion by 0.7%.
Excluding the impact of Fx, revenues increased 2% on an organic basis, primarily driven by higher demand for beverages/food/snacks in Latin America and Asia, and Europe Sub-Saharan Africa. However, organic sales growth was lower than the 3.7% rise recorded in the previous quarter.
Total volumes remained flat in the quarter against 2% growth witnessed in the previous quarter. While organic snacks/food grew 1%, beverage volumes were even.
Organic food/snacks volumes dropped 1.5% at the Frito-Lay segment, softer than 1% growth seen in the last quarter. Organic volumes decreased 1% at Quaker Foods, another American snacks business, against growth of 1% in the previous quarter.
Organic snacks volumes rose 1% at the Latin America segment (softer than 4% growth in the previous quarter) and 7% in AMENA (softer than 8% growth in the last quarter). Organic snacks volumes rose 3.5% at the Europe Sub-Saharan Africa (ESSA) segment, a shade higher than the 3% growth last quarter.
Organic beverage volumes grew 3%, same as the previous quarter. However, it declined 3% in North America, 3% in Latin America and 1% in ESSA.
Geographically, developing and emerging markets witnessed mid-single-digit organic revenue gains. The company’s two largest developing and emerging markets, Mexico and Russia, saw growth across snacks, beverages and dairy. This has led to high single-digit organic revenue growth in each of these important markets.
Organic revenue in the developed markets grew 1% in the quarter, led by solid performance of Frito-Lay North America and North American Beverages.
Segment Details
Frito-Lay North America (FLNA): Revenues improved 2% year over year (up 2% organically) to $3.49 billion driven by improved pricing. While volumes were down 1%, price improved 3%.
Core constant currency operating profit was up 4% as improved revenues and productivity gains partially offset by higher operating costs.
Quaker Foods North America (QFNA): Revenues declined 3% (down 3.5% organically) to $598 million in the quarter due to weaker volumes and price/mix. While organic volumes declined 1%, price was down 2%.
Core constant currency operating profit decreased 1% due to higher advertising and marketing expenses, which was partly offset by productivity gains and lower raw material costs.
North America Beverages (NAB): Net revenue in this segment grew 2% year over year (up 1% organic) to $4.46 billion as price/mix gains offset flat volumes. Price/mix rose 1.5%.
CSD volume decreased 4%, while non-carbonated beverages were up 4%. The non-carbonated beverage volume increase primarily reflected a double-digit increase in its overall water portfolio and a mid-single-digit increase in Gatorade sports drinks.
Core operating profit improved 3% in constant currency driven by productivity gains, lower raw material costs and favorable settlements of promotional spending accruals, which offset higher operating costs.
Latin America: Revenues increased 3% to $1.08 billion. Currency had a negative impact of 2% on revenues. Organically, revenues grew 6% driven mainly by price/mix gains. Price/mix benefited revenues by 6%.
Volumes rose 0.5% in the quarter. While snacks grew 1%, beverage organic volumes declined 3%.
Core operating profit remained flat year over year in constant-currency as operating cost inflation, higher advertising and marketing expenses, and higher raw material costs were offset by productivity gains.
Europe Sub-Saharan Africa (ESSA): Net revenue grew 6% to $1.45 billion. Currency translation had a favorable impact of 2% on revenues. Organically, revenues grew 4%. Volumes remain flat in the quarter. Price/mix grew 3.5%. While organic snacks volume was up 3.5%, beverages dropped 1%.
Core operating profit jumped 26% year over year in constant currency as productivity gains were partially offset by higher commodity, operating and marketing costs.
Asia, Middle East & North Africa (AMENA): Net revenue declined 9% to $970 billion due to currency headwinds of 11%. Organically, revenues grew 2% as improved volumes made up for softer price/mix. Volumes increased 2%. Organically, snacks rose 7%, while beverage volumes grew 3%. Price mix had a neutral effect on revenues.
Core operating profit dropped 25% year over year as productivity gains and Tingyi transaction were offset by higher raw material costs (in local currency terms, driven by a strong U.S. dollar) and operating cost inflation.
Cash and cash equivalents were $9,528 million as of Mar 25, 2017, up from $9,158 million as on Dec 26, 2016. Long-term debt was $30,081 million at the quarter end, up from $30,053 million as on Dec 26, 2016.
Net cash used for operating activities were $199 million in the quarter, against cash provided by operating activities of $305 million a year ago.
2017 Guidance
The company reaffirmed core EPS growth of 8% offset by 3% negative impact from the Fx translation implying $5.09 EPS for 2017. Excluding headwinds from currency and structural changes, organic revenues are expected to increase 3%. Currency is projected to hurt revenues by 2%, while the 53rd week in 2016 is expected to hurt sales by 1%. Also, management plans to return $6.5 billion to shareholders through dividends and share repurchases. Free cash flow is estimated at around $7 billion.
How Have Estimates Been Moving Since Then?
Following the release, investors have witnessed a downward trend in fresh estimates. There have been two downward revisions for the current quarter.
At this time, Pepsi's stock has an average Growth Score of 'C', a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of 'D' on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of 'D'. If you aren't focused on one strategy, this score is the one you should be interested in.
Zacks' style scores indicate that the stock is suitable for growth and momentum investors.
Outlook
Estimates have been broadly trending downward for the stock. The magnitude of these revisions also indicates a downward shift. Notably, the stock has a Zacks Rank #3 (Hold). We are looking for an inline return from the stock in the next few months.
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Why Is Pepsi (PEP) Up 4.3% Since the Last Earnings Report?
It has been about a month since the last earnings report for Pepsico, Inc. (PEP - Free Report) . Shares have added about 4.3% in that time frame, outperforming the market.
Will the recent positive trend continue leading up to the stock’s next earnings release, or is it 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.
Pepsi Tops Q1 Earnings, Revenues on Price Gains
Earnings
PepsiCo’s first-quarter 2017 (ending Mar 25), core earnings per share (EPS) of $0.94 beat the Zacks Consensus Estimate of $0.91 by 3.3%.
Earnings grew 5.6% year over year despite adverse impact of currency headwinds on sales. Also, currency hurt earnings by 2%. In constant currency terms, adjusted earnings grew 7% on decent sales growth.
Notably, core earnings exclude restructuring and impairment charges and commodity mark-to-market net impact. Reported earnings came in at $0.91 per share, up 43% year over year, primarily reflecting the impact of the year-ago charge related to the transaction with Tingy.
Sales
Total sales improved 1.6% year over year to $12.05 billion. Foreign exchange (Fx) hurt revenue growth by 1%. Reported revenues surpassed the Zacks Consensus Estimate of $11.97 billion by 0.7%.
Excluding the impact of Fx, revenues increased 2% on an organic basis, primarily driven by higher demand for beverages/food/snacks in Latin America and Asia, and Europe Sub-Saharan Africa. However, organic sales growth was lower than the 3.7% rise recorded in the previous quarter.
Total volumes remained flat in the quarter against 2% growth witnessed in the previous quarter. While organic snacks/food grew 1%, beverage volumes were even.
Organic food/snacks volumes dropped 1.5% at the Frito-Lay segment, softer than 1% growth seen in the last quarter. Organic volumes decreased 1% at Quaker Foods, another American snacks business, against growth of 1% in the previous quarter.
Organic snacks volumes rose 1% at the Latin America segment (softer than 4% growth in the previous quarter) and 7% in AMENA (softer than 8% growth in the last quarter). Organic snacks volumes rose 3.5% at the Europe Sub-Saharan Africa (ESSA) segment, a shade higher than the 3% growth last quarter.
Organic beverage volumes grew 3%, same as the previous quarter. However, it declined 3% in North America, 3% in Latin America and 1% in ESSA.
Geographically, developing and emerging markets witnessed mid-single-digit organic revenue gains. The company’s two largest developing and emerging markets, Mexico and Russia, saw growth across snacks, beverages and dairy. This has led to high single-digit organic revenue growth in each of these important markets.
Organic revenue in the developed markets grew 1% in the quarter, led by solid performance of Frito-Lay North America and North American Beverages.
Segment Details
Frito-Lay North America (FLNA): Revenues improved 2% year over year (up 2% organically) to $3.49 billion driven by improved pricing. While volumes were down 1%, price improved 3%.
Core constant currency operating profit was up 4% as improved revenues and productivity gains partially offset by higher operating costs.
Quaker Foods North America (QFNA): Revenues declined 3% (down 3.5% organically) to $598 million in the quarter due to weaker volumes and price/mix. While organic volumes declined 1%, price was down 2%.
Core constant currency operating profit decreased 1% due to higher advertising and marketing expenses, which was partly offset by productivity gains and lower raw material costs.
North America Beverages (NAB): Net revenue in this segment grew 2% year over year (up 1% organic) to $4.46 billion as price/mix gains offset flat volumes. Price/mix rose 1.5%.
CSD volume decreased 4%, while non-carbonated beverages were up 4%. The non-carbonated beverage volume increase primarily reflected a double-digit increase in its overall water portfolio and a mid-single-digit increase in Gatorade sports drinks.
Core operating profit improved 3% in constant currency driven by productivity gains, lower raw material costs and favorable settlements of promotional spending accruals, which offset higher operating costs.
Latin America: Revenues increased 3% to $1.08 billion. Currency had a negative impact of 2% on revenues. Organically, revenues grew 6% driven mainly by price/mix gains. Price/mix benefited revenues by 6%.
Volumes rose 0.5% in the quarter. While snacks grew 1%, beverage organic volumes declined 3%.
Core operating profit remained flat year over year in constant-currency as operating cost inflation, higher advertising and marketing expenses, and higher raw material costs were offset by productivity gains.
Europe Sub-Saharan Africa (ESSA): Net revenue grew 6% to $1.45 billion. Currency translation had a favorable impact of 2% on revenues. Organically, revenues grew 4%. Volumes remain flat in the quarter. Price/mix grew 3.5%. While organic snacks volume was up 3.5%, beverages dropped 1%.
Core operating profit jumped 26% year over year in constant currency as productivity gains were partially offset by higher commodity, operating and marketing costs.
Asia, Middle East & North Africa (AMENA): Net revenue declined 9% to $970 billion due to currency headwinds of 11%. Organically, revenues grew 2% as improved volumes made up for softer price/mix. Volumes increased 2%. Organically, snacks rose 7%, while beverage volumes grew 3%. Price mix had a neutral effect on revenues.
Core operating profit dropped 25% year over year as productivity gains and Tingyi transaction were offset by higher raw material costs (in local currency terms, driven by a strong U.S. dollar) and operating cost inflation.
Margins
Core gross margins contracted 45 basis points (bps). Core operating margin contracted 28 bps on lower gross margin gains.
Financials
Cash and cash equivalents were $9,528 million as of Mar 25, 2017, up from $9,158 million as on Dec 26, 2016. Long-term debt was $30,081 million at the quarter end, up from $30,053 million as on Dec 26, 2016.
Net cash used for operating activities were $199 million in the quarter, against cash provided by operating activities of $305 million a year ago.
2017 Guidance
The company reaffirmed core EPS growth of 8% offset by 3% negative impact from the Fx translation implying $5.09 EPS for 2017. Excluding headwinds from currency and structural changes, organic revenues are expected to increase 3%. Currency is projected to hurt revenues by 2%, while the 53rd week in 2016 is expected to hurt sales by 1%. Also, management plans to return $6.5 billion to shareholders through dividends and share repurchases. Free cash flow is estimated at around $7 billion.
How Have Estimates Been Moving Since Then?
Following the release, investors have witnessed a downward trend in fresh estimates. There have been two downward revisions for the current quarter.
Pepsico, Inc. Price and Consensus
Pepsico, Inc. Price and Consensus | Pepsico, Inc. Quote
VGM Scores
At this time, Pepsi's stock has an average Growth Score of 'C', a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of 'D' on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of 'D'. If you aren't focused on one strategy, this score is the one you should be interested in.
Zacks' style scores indicate that the stock is suitable for growth and momentum investors.
Outlook
Estimates have been broadly trending downward for the stock. The magnitude of these revisions also indicates a downward shift. Notably, the stock has a Zacks Rank #3 (Hold). We are looking for an inline return from the stock in the next few months.