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Why Is Pepsico (PEP) Up 0.8% Since Its 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 0.8% in that time frame.

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

PepsiCo Q2 Earnings Beat, Revenues Lag

PepsiCo reported second-quarter 2018 results, wherein earnings topped estimates while sales lagged. Notably, this marked the ninth consecutive quarter of positive earnings surprise. The improvement was mainly attributable to strong performances in its international divisions, propelled by higher revenue growth in developing and emerging markets.

Earnings

PepsiCo’s second-quarter core earnings per share of $1.61 beat the consensus mark of $1.51 per share by 6.6% and increased 8% year over year. In constant-currency terms, adjusted earnings improved 7% from the year-ago period.

Core earnings exclude restructuring and impairment charges, and commodity mark-to-market net impact. The company reported earnings of $1.28 per share, reflecting a decline of 13% year over year. The foreign exchange translation had a positive impact of 1 percentage point on reported EPS.

Sales

Net revenues of $16,090 million increased 2.4% from the year-ago level. Foreign exchange (Fx) had 1 percentage point positive impact on revenue growth. However, reported revenues lagged the Zacks Consensus Estimate of $16,125 million.

Excluding the impact of Fx, revenues increased 2.6% on an organic basis, primarily driven by strength in the majority of the company’s businesses, particularly international divisions that gained from persistent growth in emerging and developing markets. Among these, Latin America; Asia, Middle East and North Africa (AMENA); Europe Sub-Saharan Africa (ESSA); and Frito-Lay North America (FLNA) segments reported organic revenue growth in the second quarter.

Total volume grew 1% in the reported quarter, unchanged from the previous quarter. While organic snacks/food volume increased 1% (a declined from 3% growth witnessed in the first quarter), beverage volume rose 0.5% (versus 1% decline in the first quarter).

Segment Details

Revenues decreased 1% at the North America Beverages (NAB) segment, 2% in AMENA and 5% in QFNA. Meanwhile, the company’s revenues improved 11% in ESSA, 1% in Latin America and 4% in FLNA segments.

Operating profits (on a reported basis) decreased 16% for NAB and 11% for ESSA segments. However, the same grew 18% for Latin America, 5% for FLNA and 61% for AMENA segments. Meanwhile, operating profit remained unchanged at the QFNA division.

Margins

Core gross margin contracted 35 basis points (bps) while core operating margin expanded 5 bps.

Financials

The company ended second-quarter 2018 with cash and cash equivalents of $13,858 million, long-term debt of $30,638 million and shareholders’ equity of $10,221 million.

Net cash used for operating activities was $1,087 million in the second quarter, compared with $2,251 million in the year-ago quarter.

Reaffirms 2018 Guidance

PepsiCo expects full-year organic revenue growth (excluding headwinds from currency and structural changes) to be approximately 2.3%, in line with the 2017 level. Currency is projected to have a neutral effect on top and bottom lines.

PepsiCo expects core EPS of $5.70, reflecting 9% growth from earnings of $5.23 per share in 2017.

Further, management plans to return $7 billion to shareholders through dividends worth $5 billion and share repurchases worth $2 billion. Free cash flow is estimated at around $6 billion. Operating cash flow is expected to be nearly $9 billion, with net capital spending of $3.6 billion.

 

How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates. There have been two revisions lower for the current quarter.

Pepsico, Inc. Price and Consensus

 

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

VGM Scores

At this time, PEP has a nice Growth Score of B, though it is lagging a bit on the momentum front with a C. The stock was also allocated a grade of B on the value side, putting it in the top 40% for this investment strategy.

Overall, the stock has an aggregate VGM Score of B. 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 equally suitable for value and growth investors while momentum investors may want to look elsewhere.

Outlook

Estimates have been broadly trending downward for the stock and the magnitude of these revisions indicates a downward shift. Notably, PEP has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.




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