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PepsiCo (PEP) Q3 Earnings: What's in Store for the Stock?

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Food/beverage giant PepsiCo, Inc. (PEP - Free Report) is slated to announce third-quarter fiscal 2016 results (ending Sep 3, 2016) on Sep 29, 2016 before the opening bell.

Last quarter, the company posted a positive earnings surprise of 5.47%. The company has also clocked positive earnings surprises in the past four quarters, at an average of 5.62%.

Let’s see how things are shaping up for this announcement.

Factors to Consider

PepsiCo delivered solid second-quarter 2016 results, backed by 3.3% organic revenue growth. All segments were in the positive organic growth territory, led by a 9% gain for the Latin America business and a 4% rise from Frito Lay North America. Even, its core gross margin improved 75 basis points (bps) and operating margin was 80 bps higher than last year.

PepsiCo has been doing well on the back of significant innovation, continued momentum in Frito-Lay business, revenue management strategies, improved productivity and better market execution.

That said, weak soda volumes in developed markets such as the U.S. have become a pressing concern for PepsiCo and for other nonalcoholic beverage companies like The Coca-Cola Company (KO - Free Report) and Dr Pepper Snapple Group, Inc. (DPS - Free Report) .

Health-conscious consumers are shifting from soda beverages to still or noncarbonated beverages. The carbonated soft drink or soda beverage volumes of PepsiCo’s North America Beverages segment dropped in the first two quarters of fiscal 2016.

Again, as highlighted during the fiscal second-quarter earnings call by PepsiCo, foreign exchange headwind will be heavily skewed to the third quarter in comparison to the fourth quarter. PepsiCo will likely face more difficult core constant currency operating profit growth comparisons in the second half at Frito-Lay North America. North America Beverages or NAB has particularly difficult revenue and operating profit lapse in the third quarter. PepsiCo anticipates low single-digit raw material inflation, including the impact of foreign exchange translation in the second half compared to modest deflation in the first half.

For the fiscal third quarter, the Zacks Consensus Estimate for earnings stands at $1.32, reflecting a 2.6% year-over-year decrease. Meanwhile, our estimate for revenues is pegged at $15.89 billion, implying a 2.7% decline.

PEPSICO INC Price and EPS Surprise


PEPSICO INC Price and EPS Surprise | PEPSICO INC Quote

Earnings Whispers

Our proven model does not conclusively show that PepsiCo is likely to beat earnings this quarter. This is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here, as you will see below.

Zacks ESP: The Earnings ESP for PepsiCo is 0.00% as both the Most Accurate Estimate and Zacks Consensus Estimate stand at $1.32.

Zacks Rank: Although PepsiCo’s Zacks Rank #3 increases the predictive power of ESP, the company’s 0.00% ESP makes surprise prediction difficult.

Note that we caution against stocks with a Zacks Rank #4 or #5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing a negative estimate revisions momentum.

Here is one beverage stock having both a positive Earnings ESP and a favorable Zacks Rank:

Craft Brew Alliance, Inc. (BREW - Free Report) with an Earnings ESP of +6.25% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank stocks here.

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