Earnings Preview: PepsiCo

Food and beverage giant, PepsiCo, Inc. (PEP - Analyst Report) is all set to unveil its third quarter 2012 results before the start of trading on October 17, 2012. The Zacks Consensus Estimate for the third quarter is $1.16 (estimated year-over-year decline of 11.6%) on revenues of $16.9 billion (year-over-year decrease of 4.0%).

Second Quarter Recap

PepsiCo’s second quarter 2012 earnings declined 7% year over year to $1.12 per share hurt by a sluggish top line and currency and commodity cost headwinds. However, earnings edged past the Zacks Consensus Estimate of $1.09. Revenues declined 2% in the quarter to $16.46 billion mainly due to currency headwinds and re-franchising of the beverage business in China and Mexico. Excluding these headwinds, organic revenue was up 5% helped mainly by price increases. Read our full report at PepsiCo Beats EPS; Misses Sales.

Agreement of Estimate Revisions

Over the past 7 days, while 3 of 12 estimates for PepsiCo’s third quarter 2012 earnings have been revised downward, none moved in the opposite direction. For full year 2012, while one estimate moved down over the past 7 days, none moved upwards.

Over the last 30 days, 5 estimates have moved down and one has gone up for the third quarter. For 2012, 2 estimates moved down and one moved up over that timeframe.

Most of the estimates were revised after the announcement of second quarter results in July this year. However, we believe the downward pressure on earnings may be due to expected currency headwinds.

Magnitude of Estimate Revisions

The consensus estimate for the third quarter of 2012 has remained static over the last 7 as well as 30 days at $1.16. The consensus estimate for 2012 has gone down by a cent from $4.07 to $4.06 over the last 7 as well 30 days.

Surprise History

PepsiCo has surpassed earnings estimates in all of the past four quarters, recording a maximum positive surprise of 2.99% in the first quarter of 2012. On average, the earnings surprise is a positive 2.27% over the same timeframe.

Our Recommendation

We currently have a Neutral recommendation on PepsiCo. The stock carries a Zacks #3 Rank (a short-term ‘Hold’ rating).

We are encouraged by the company’s strong brand portfolio, its product and geographic diversity and solid cash flow generation. Moreover, PepsiCo’s marketing support investments, brand building innovation and cost saving efforts will boost growth. However, we prefer to remain on the sidelines until we see some meaningful impact of these investments on the operating results. Moreover, a challenging consumer spending environment combined with higher commodity costs raise concern. PepsiCo also faces strong competition from The Coca-Cola Company (KO - Analyst Report). In the U.S. measured channels, The Coca-Cola Company commands a larger share of carbonated soft drink (CSD) consumption. The Coca-Cola Company also enjoys higher market share in many markets outside the United States than PepsiCo.