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PepsiCo (PEP) Down 4.9% Since Last Earnings Report: Can It Rebound?

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A month has gone by since the last earnings report for PepsiCo (PEP - Free Report) . Shares have lost about 4.9% in that time frame, underperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is PepsiCo due for a breakout? 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 drivers.

PepsiCo Q2 Earnings Beat, Segmental Results Drive Sales

PepsiCo reported solid second-quarter 2019 results, wherein earnings and sales surpassed estimates. With this, the company reported sales beat in eight of the last 10 quarters. Further, it recorded positive earnings surprise in 13 of the last 14 quarters. However, the company’s core earnings per share declined year over year, thanks to increased SG&A expenses that also hurt operating margins. It reiterated its guidance for 2019.

Quarter in Detail

PepsiCo’s second-quarter core earnings per share (EPS) of $1.54 beat the Zacks Consensus Estimate of $1.49. However, core EPS declined 7.2% year over year. In constant currency, core earnings were down 2% from the year-ago period.

The company’s reported earnings of $1.44 per share improved nearly 13% year over year. Foreign exchange translation unfavorably impacted reported EPS by 2 percentage points.

Net revenues of $16,449 million advanced 2.2% year over year and surpassed the Zacks Consensus Estimate of $16,390 million. Notably, revenues included the negative impact of 3 percentage points from Fx. On an organic basis, excluding currency headwinds, revenues increased 4.5%.

Growth in reported revenues was primarily driven by strength in all of the company’s businesses, except for Asia, Middle East and North Africa (AMENA). Notably, Frito-Lay North America and all international divisions (except for AMENA) reported robust revenues. Furthermore, all of the company’s segments reported organic revenue growth in the second quarter.

Total volume remained flat in the reported quarter compared with 2% growth in the first quarter of 2019. While organic snacks/food volume increased 2% (versus 1% growth witnessed in the first quarter), beverage volume was flat (compared with 2% rise in the last reported quarter).

On a consolidated basis, reported gross margin expanded 12 basis points (bps) while core gross margin improved 72 bps. Reported operating margin contracted 222 bps while core operating margin declined 127 bps. The decline in operating margin was mainly caused by higher SG&A expenses.

Segment Details

Reported revenues declined 1% at the AMENA segment. Meanwhile, net revenues improved 2.5% each at PBNA and QFNA, 4.5% at FLNA, 2% at Latin America, and 0.5% at ESSA segments. Organic revenues improved 5% each at FLNA, ESSA and AMENA segments as well as 3% at QFNA, 2% at PBNA and 10% at Latin America.

Operating profit (on a reported basis) decreased 12% for the QFNA segment along with declines of 8% at PBNA, 16% at ESSA and 34% at AMENA. However, it grew 4% each for Latin America and FLNA segments.

Financials

The company ended second-quarter 2019 with cash and cash equivalents of $3,293 million, long-term debt of $27,712 million, and shareholders’ equity (excluding non-controlling interest) of $13,952 million.

Net cash from operating activities was $1,388 million as of Jun 15, 2019, compared with $1,087 million as of Jun 16, 2018.

Guidance

PepsiCo reiterated its guidance for 2019. It plans to continue investing in capabilities that will position it for growth.

For 2019, the company anticipates organic revenue growth of 4%, with nearly 1% decline in core constant-currency EPS. The decline in EPS is likely to be led by impacts of incremental investments to strengthen its business in 2019, higher effective tax rate guidance, and lapping of a number of asset-sale and refranchising gains that occurred in 2018. Effective tax rate is estimated to be nearly 21% in 2019.

Moreover, the company estimates currency to impact revenues and EPS by nearly 2 percentage points in 2019, based on current rates. Due to the above-mentioned factors, it anticipates core earnings of $5.50 per share in 2019, suggesting a 3% decline from $5.66 reported in 2018.

Further, management plans to return $8 billion to shareholders through dividends worth $5 billion and share repurchases worth $3 billion. Free cash flow is estimated to be around $5 billion. Operating cash flow is expected to be nearly $9 billion, with net capital spending of $4.5 billion.

How Have Estimates Been Moving Since Then?

It turns out, estimates revision have trended downward during the past month.

VGM Scores

At this time, PepsiCo has a subpar Growth Score of D, a grade with the same score on the momentum front. Charting a somewhat similar path, the stock was allocated a grade of C on the value side, putting it in the middle 20% 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.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, PepsiCo has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.


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