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Pepsi Outperforms, Can Coke Follow?

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PEP Earnings Results

PepsiCo (PEP - Free Report) stock soared over 3% this morning following a huge earnings beat, hitting an all-time high of $126.85. Earnings came in at $0.97 per share vs. the $0.92 estimate and sales were reported at $12.88 billion vs. the estimated $12.65 billion, both of which illustrated YoY growth. Frito-Lay North America continues to be the biggest growth driver for this business, making up 30% of PepsiCo’s total revenue and over 50% of the company’s operating profits, reported 6% growth organically this quarter. PEP is on track to hit its 4% organic growth target that management has set. PEP is currently sitting at a Zacks Ranking #3 (Hold), but after these positive earnings and management outlook, 2019 estimates should reflect and push this stock to a buy.

KO Outlook

2019 has been a stellar year for PEP thus far with total returns north of 15% since January 1st. PEP has significantly outperformed its bigger competitor Coca-Cola Co (KO - Free Report) by a whole 14% so far this year. KO slid almost 10% in mid-February after management adjusted EPS guidance down to flat for from its expected 7% growth for 2019, quoting pessimistic economic outlook and rising transportation costs. Analysts are saying that this downward adjustment is very conservative and are still expecting to see some growth in 2019. These companies have been going head-to-head for years, each using the other as a benchmark for performance and industry shifts. YTD comparison below, PEP (blue) vs. KO (red).

 

KO is announcing Q1 earnings one week from today on April 24th. EPS estimates are sitting at $0.46 and sales are expected to be $7.89 billion. Sell-side analysts have adjusted earnings down since management revised guidance to a more conservative outlook. With these downward revisions look to see a potential earnings beat for this quarter and the rest of 2019. KO has either been in line or beat earnings for the last 6 consecutive reports. KO Zacks Rank #3 (Hold)

CPG Category Outlook

Consumer packaged goods (CPG) have hit their growth peak in recent years and are headed towards a decline. This category is continuing to consolidate with the big conglomerates attempting to leverage economies to scale with their massive distribution channels and efficient manufacturing techniques. The issue is that the new “millennial” consumer is more interested in healthy options than the convenient cheap choices that these CPG companies have to offer.

KO and PEP have both attempted to penetrate this healthy trend with PEP acquiring Naked, Kevita and just recently buying Soda Stream. KO has acquired Honest Tea, Costa Coffee, MOJO Kombucha, and just bought a minority stake in the growing Gatorade competitor Body Armor. These parent companies do their best to distance themselves from the marketing campaigns of these healthier options because once consumers find out that Coca-Cola or PepsiCo manufacture these products, they are immediately associated with an over-processed and unhealthy goods. These companies are going to have to change consumers’ brand association if they are going to be successful in pivoting to the changing consumer.

 

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