A month has gone by since the last earnings report for PepsiCo (PEP - Free Report) . Shares have added about 4.5% in that time frame, outperforming the S&P 500.
Will the recent positive trend continue leading up to its next earnings release, or is PepsiCo due for a pullback? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at the most recent earnings report in order to get a better handle on the important drivers.
PepsiCo Q3 Earnings & Sales Top, Organic Sales View Up
PepsiCo reported third-quarter 2018 results, wherein both earnings and sales topped estimates. Notably, this marked the 11th consecutive quarter of positive earnings surprise. Further, sales beat after a miss in the preceding quarter. With this, the company has reported sales beat in five of the last seven quarters.
The improvement in earnings can be mainly attributed to strong performances in its international divisions, driven by solid revenue growth in developing and emerging markets. Additionally, strong net revenues and operating profit growth at Frito-Lay North America, along with another quarter of sequential revenue growth in North America Beverages segment aided results.
PepsiCo’s third-quarter core earnings per share of $1.59 beat the Zacks Consensus Estimate of $1.56 per share by 1.9% and increased 7.4% year over year. In constant-currency terms, adjusted earnings improved 9% from the year-ago period.
Core earnings exclude restructuring and impairment charges, and commodity mark-to-market net impact. The company’s reported earnings of $1.75 per share reflected an increase of 17.4% year over year. Foreign exchange translation had a negative impact of 2 percentage points on reported EPS.
Net revenues of $16,485 million increased 1.5% from the year-ago level and surpassed the Zacks Consensus Estimate of $16,378 million. Backed by the recent strengthening of the U.S. dollar, foreign exchange (Fx) had a 2-percentage point negative impact on revenue growth. Excluding the impact of Fx and acquisitions, structural and other changes, revenues increased 4.9% on an organic basis.
This was 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); North America Beverages (NAB) and Frito-Lay North America (FLNA) segments reported organic revenue growth in the third quarter.
Total volume grew 2% in the reported quarter, up from 1% growth witnessed in the prior quarter. While organic snacks/food volume increased 3% (an increase from 1% growth witnessed in the second quarter), beverage volume rose 2.5% (up from 0.5% increase in the second quarter).
Revenues declined 2% at both AMENA and QFNA segments. Meanwhile, net revenues improved 2% in NAB and ESSA segments, and 3% in FLNA. However, Latin America reported flat revenues for the quarter.
Operating profits (on a reported basis) decreased 14% for NAB and 1.5% for QFNA segments. However, the same grew 3% for ESSA, 3.5% for FLNA and 17% for AMENA segments. Meanwhile, operating profit remained unchanged for the Latin America division.
Overall, reported gross margin contracted 30 basis points (bps), with 10 bps contraction in core gross margin. Reported operating margin declined 75 bps while core operating margin contracted 25 bps.
The company ended third-quarter 2018 with cash and cash equivalents of $11,991 million, long-term debt of $30,643 million and shareholders’ equity of $10,286 million.
Net cash provided by operating activities was $4,732 million as of Sep 8, 2018, compared with $6,087 million in the year-ago period.
Driven by the strong year-to-date performance, PepsiCo raised its organic revenue growth guidance for 2018. Further, the company adjusted its full-year earnings per share projections to reflect the anticipated unfavorable impact from foreign exchange due to the recent strengthening of the U.S. dollar.
PepsiCo now expects full-year organic revenue growth (excluding headwinds from currency and structural changes) to be at least 3%, compared with the prior guidance of approximately 2.3% growth. Currency is projected to have nearly 1 percentage point negative impact on both top and bottom lines.
Including the negative currency impact, PepsiCo now expects core EPS of $5.65, reflecting an 8% increase from earnings of $5.23 per share in 2017. Earlier, the company had anticipated core EPS of $5.70, indicating 9% growth. The company continues to estimate core constant-currency EPS growth of 9%.
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 now estimated to be $3.3 billion ($3.6 billion spending expected earlier).
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates.
At this time, PepsiCo has a nice Growth Score of B, though it is lagging a bit on the Momentum Score front with a C. 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.
Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. It's no surprise PepsiCo has a Zacks Rank #4 (Sell). We expect a below average return from the stock in the next few months.