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Can PepsiCo (PEP) Beat Earnings in Q3 Despite Soft CSD Trend?

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PepsiCo, Inc. (PEP - Free Report) is set to report third-quarter 2018 results on Oct 2, before the market opens. In the last-reported quarter, the company delivered a positive earnings surprise of 6.6%. It also surpassed expectations in each of the trailing four quarters, with an average of 4%.

Let’s See How Things are Shaping Up for Q3

PepsiCo has been trying to improve performance through product launches, fortifying developing/emerging market presence, aggressive marketing, productivity improvement and cost-saving initiatives. Success of the company’s initiatives was well reflected in second-quarter 2018 earnings, which were driven by strong international performance on the back of revenue growth in 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 nine consecutive quarters.

The Zacks Consensus Estimate for earnings in the quarter to be reported is $1.56 per share, reflecting year-over-year growth of 5.4%. We note that the consensus mark for the to-be-reported quarter has been stable in the last 30 days. Overall, for the third quarter, the Zacks Consensus Estimate for revenues is pegged at $16.4 billion, reflecting 1.2% growth from the prior-year quarter.

Pepsico, Inc. Price and EPS Surprise

 

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

 

However, consumers’ awareness on health and wellness, new taxes on sugar-sweetened beverages, and rising regulatory pressure affecting CSD sales have been major killjoys for the industry. Consequently, 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 2% in the second 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.

As a result, PepsiCo stock has declined over the past month, reflecting a negative sentiment ahead of earnings. The company’s shares have dipped 0.4%. However, the stock has rallied 3.4% in the last three months, outperforming the industry’s increase of 2.1%.

 



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.

Revenues from its Everyday Nutrition portfolio have increased to 27.5% of total revenues. 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 dependence on colas, keeping in mind the slowdown in CSD volumes. The company has been growing value share in a number of its fastest-growing categories, including tea, enhanced water and sparkling water. Meanwhile, tea portfolio under Lipton and Pure Leaf has grown retail sales in the range of a mid-single digit to as high as 21% over the past 17 quarters.

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.

Earnings ESP: PepsiCo has an Earnings ESP of -2.01%. 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 #2 (Buy). The combination of positive Rank and negative ESP makes surprise prediction difficult.

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:

Altria Group Inc. (MO - Free Report) has an Earnings ESP of +2.44% and a Zacks Rank #2. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Avon Products Inc. (AVP - Free Report) has an Earnings ESP of +60.00% and a Zacks Rank #3.

Monster Beverage Corporation (MNST - Free Report) has an Earnings ESP of +1.10% and a Zacks Rank of 3.

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