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Pepsico (PEP) Down 2% Since Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for Pepsico, Inc. (PEP - Free Report) . Shares have lost about 2% in that time frame, underperforming the market.

Will the recent negative trend continue leading up to the stock's next earnings release, or is it due for a breakout? Before we dive into how investors and analysts have reacted of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

PepsiCo Beats on Q2 Earnings & Revenues, Guides Up

PepsiCo’s second-quarter 2017 (ending Jun 17) core earnings per share (EPS) of $1.50 beat the Zacks Consensus Estimate of $1.39 by 7.9%. Core earnings grew 10% year over year. In constant currency terms, adjusted earnings grew 13%. The upside was primarily driven by higher pricing, partly offsetting the weak demand.

Core earnings exclude restructuring and impairment charges and commodity mark-to-market net impact. Reported earnings came in at $1.46 per share, reflecting an increase of 6% year over year. Foreign exchange translation had an adverse impact of 2% on reported EPS.

Sales

Total sales improved 2% year over year to $15.71 billion. Although foreign exchange (Fx) hurt revenue growth by 1.5%, pricing had a positive impact of 3% on revenues. Reported revenues surpassed the Zacks Consensus Estimate of $15.57 billion by 0.8%.

Excluding the impact of Fx, revenues increased 3.1% on an organic basis, primarily driven by higher demand for beverages/food/snacks in Latin America and Europe Sub-Saharan Africa. Notably, organic sales growth was higher than the 2.1% rise recorded in the previous quarter.

Total volumes remained flat during the quarter, same as witnessed in the previous quarter. While organic snacks/food increased 2% (higher than 1% growth witnessed in the first quarter), beverage volumes dropped 2%.

Quarterly Segment Details

Revenues grew 3% at the Frito-Lay segment, 2% at North America Beverages (NAB), and 6% at both the Latin America as well as the Europe Sub-Saharan Africa (ESSA) segments. However, revenues declined 1% in its Quaker Foods and 8% in its Asia, Middle East and North Africa (AMENA) segments.

Operating profits increased 6% in its Frito-Lay segment, 2% in NAB and by a significant 49% in ESSA. However, operating profits decreased 6% and 19% in Latin America and AMENA divisions, respectively.

Margins

Core gross margins contracted 5 basis points (bps). However, core operating margin expanded 50 bps. The sale of minority stake in Britvic plc positively impacted core operating margin.

Financials

Cash and cash equivalents were $10,282 million as of Jun 17, 2017, up from $9,158 million as of Dec 26, 2016. Long-term debt was $31,205 million at the end of the quarter, increasing from $30,053 million as of Dec 26, 2016.

Net cash provided by operating activities were $2,241 million in the first six months of 2017 compared with $3,107 million a year ago.

2017 Guidance

PepsiCo lifted its core EPS forecast to $5.13 from $5.09 expected earlier. The company expects core EPS growth of 8% offset by 2% negative impact (previously expected to be 3%) from the Fx translation implying $5.13 EPS for 2017. The company now anticipates foreign exchange to have less negative impact on core earnings than previously expected.

Excluding headwinds from currency and structural changes, organic revenues are expected to rise 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 to be 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 six revisions lower for the current quarter. In the past month, the consensus estimate has shifted lower by 5.7% due to these changes.

Pepsico, Inc. Price and Consensus

 

Pepsico, Inc. Price and Consensus | Pepsico, Inc. Quote

VGM Scores

At this time, Pepsico's stock has an average Growth Score of 'B', however its Momentum is lagging a lot with a 'D'. 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 'C'. If you aren't focused on one strategy, this score is the one you should be interested in.

Based on our scores, the stock is more suitable for growth investors than those looking for value and momentum.

Outlook

Estimates have been broadly trending downward for the stock. The magnitude of this revision also indicates a downward shift. Notably, the stock has a Zacks Rank #3 (Hold). We expect in-line returns from the stock in the next few months.




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