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Will Segment Sales Growth Drive PepsiCo's (PEP) Q2 Earnings?

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PepsiCo, Inc. (PEP - Free Report) is set to report second-quarter 2018 results on Jul 10, before market open. In the last reported quarter, the company delivered a positive earnings surprise of 4.4%. It also surpassed expectations in each of the trailing four quarters, with an average of 4.3%.

Let’s See How Things are Shaping Up for Q2

PepsiCo has been head on heels trying to improve its performance through product launches, fortifying developing/emerging market presence, aggressive marketing, productivity improvement and cost-saving initiatives. The success of the company’s initiatives was well reflected in first-quarter 2018 earnings, which were driven by strong international performance on revenue growth in the developing and emerging markets.

Moreover, the company’s fundamental strength is evident from its solid brand portfolio, product innovation and strong snacks business. Notably, PepsiCo has delivered positive earnings surprise for eight consecutive quarters.

Pepsico, Inc. Price and EPS Surprise

Pepsico, Inc. Price and EPS Surprise | Pepsico, Inc. Quote

As a result, PepsiCo stock has been gaining over the past month, reflecting a positive sentiment ahead of earnings. The company’s shares have increased 7.9%, outperforming the industry’s 4.4% rise.

Also, the Zacks Consensus Estimate for the quarter to be reported is $1.51 per share, reflecting a year-over-year growth of 0.7%. However, we note that the consensus mark for the to-be-reported quarter has moved south in the last seven days. The downward estimate movement can be attributed to the fact that the beverage industry is witnessing sluggish CSD (carbonated soft drinks) volumes, which is a pressing concern. CSD volumes for PepsiCo’s North America Beverages (NAB) business decreased 4% in the first quarter of 2018. Looking back, PepsiCo’s CSD volumes declined 2% each in 2014 and 2015, 1% in 2016 and 5% in 2017 in the NAB business.

Furthermore, consumer taste is rapidly shifting from CSDs to non-carbonated beverages. To this end, PepsiCo is gradually reshuffling its portfolio toward healthier alternatives. Currently, a major portion of PepsiCo’s total net revenues comes from “Guilt-Free” products, more than half of which comes from the “Everyday Nutrition” category. This percentage is likely to increase, given the company’s stepped-up innovation and focus on adapting to changing consumer preferences.

PepsiCo has also broadened its beverage portfolio to include more non-carbonated beverages to decrease the dependence on colas, keeping in mind the slowdown in CSD volumes. The company’s non-carbonated beverage volume mix increased 7 percentage points since 2010.

Nonetheless, results of the NAB segment — comprising beverage businesses in the United States and Canada — remained soft in the first quarter. This is because it was negatively impacted by higher input costs and operating cost inflation that substantially offset productivity gains. The results were also affected by a bonus, extended to certain U.S. employees in connection with the TCJ Act.

Segment Discussion

PepsiCo’s North America Beverages or NAB business accounts for about 33% of the company’s total revenues. Revenues at the segment declined 1% in first-quarter 2018, preceded by declines of 6% and 3% in the fourth quarter and third quarter of 2017. However, the metric remained unchanged in the first two quarters of 2017. The trend is unlikely to reverse in the to-be-reported quarter as well. For the second quarter, the Zacks Consensus Estimate for NAB segment revenues is pegged at $5.18 billion. This reflects an increase from $4.4 billion reported in the first quarter and a decline from $5.24 billion in the year-ago quarter.

For the Frito-Lay North America or FLNA business (accounting for 25% of revenues), PepsiCo had a good balance of volume growth and net price realization. The segment’s revenues improved 3% last quarter. The Zacks Consensus Estimate for the segment revenues is pegged at $3.8 billion, mirroring an increase from $3.6 billion in the prior quarter and $3.7 billion in the year-ago period.

The Quaker Foods North America segment revenues improved marginally in the first quarter. The Zacks Consensus Estimate for the segment revenues is pegged at $551 million compared with $601 million in the first quarter and $553 million in the second quarter of 2017.

The Europe Sub-Saharan Africa segment revenues grew 15% in the first quarter. The Zacks Consensus Estimate for the segment revenues is pegged at $3.04 billion, implying an increase from $2.8 billion in the prior-year quarter and $1.7 billion last quarter.

The Latin America segment revenues were up 14% in the last reported quarter. The Zacks Consensus Estimate for the segment revenues is pegged at $1.9 billion compared with $1.8 billion in the second quarter of 2017 and $1.2 billion in first-quarter 2018.

Revenues at the Asia, Middle East and North Africa segment improved 7% year over year in the first quarter. The metric is likely to increase to $1.7 billion in the second quarter of 2018 from $1.6 billion registered in the year-ago period and $1.04 billion in the prior quarter, per the consensus estimate.

Overall, for the second quarter, analysts polled by Zacks expect revenues to come in at $16.1 billion, reflecting 2.6% growth from the prior-year quarter.

Quantitative Model Prediction

Here is what our quantitative model predicts:

PepsiCo does not have the right combination of the two key ingredients — a positive Earnings ESP and Zacks Rank #3 (Hold) or higher — to increase the odds of an earnings beat.

Zacks ESP: PepsiCo has an Earnings ESP of +0.18%. You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks Rank: PepsiCo has a Zacks Rank #4 (Sell), which lowers the predictive power of ESP.

Stocks to Consider

Here are some companies that you may want to consider as our model shows that these have the right combination of elements to post an earnings beat:

Calyxt, Inc. (CLXT - Free Report) has an Earnings ESP of +3.70% and a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Church & Dwight Co., Inc. (CHD - Free Report) has an Earnings ESP of +1.17% and a Zacks Rank #3.

Monster Beverage Corporation (MNST - Free Report) has an Earnings ESP of +1.00% and a Zacks Rank of 3.

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