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PepsiCo (PEP) Set to Report Q3 Earnings: What's in Store for the Beverage Giant?

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PepsiCo (PEP - Free Report) is set to report their third quarter results on Thursday before the opening bell. The beverage giant’s shares have climbed 22.1% in 2019 thus far, outpacing the broader beverage market’s 20.2% gain.

The company is coming off a second quarter where it beat on both the top and bottom lines, and reaffirmed financial guidance for fiscal 2019. This upcoming earnings season will be heavily monitored by Wall Street as recession fears circulate throughout the market. Pepsi is one of the large cap companies reporting early this earnings season, so let’s take a look at how the firm might report on Thursday.

Company Overview

PepsiCo is one of the leading global food and beverage companies. Its brands include Frito-Lay snacks, Pepsi-Cola beverages, Gatorade sports drinks, Tropicana juices and Quaker foods. The company serves customers in more than 200 countries and territories. The food and drink giant owes its performance thus far to its robust surprise trend. Q2 marked its eighth sales beat in the last 10 quarters and its 13th positive earnings surprise in the last 14 quarters.

Pepsi reported a 2.2% hike in net revenue to $16.4 billion but core EPS fell 7.2% to $1.54 per share. Organic revenue expanded by 4.5% after growing by 5.2% in the first quarter.

Organic growth was led by a 4.5% expansion in the company's second-largest segment, Frito Lay North America. Latin America and Europe Sub-Saharan Africa (ESSA) enjoyed top-line gains of 2% and 0.5%, respectively, while Asia, Middle East, and North Africa (AMENA) fell 1%. Quaker Foods North America (QFNA) saw a 2% jump in sales and PepsiCo Beverages North America (PBNA) popped 2%.

Q3 and Beyond Outlook

PepsiCo expects full-year organic revenue growth of 4%. Management anticipates that core diluted earnings per share will decline 1% on a constant currency basis.

Our Q3 consensus estimates project core earnings to fall 5.66% to $1.50 per share and for net revenue to pop 2.9% to $16.96 billion. The Frito Lay North America segment is projected to continue its growth campaign with a 5.1% spike to $4.09 billion. The North America Pepsi Beverages and Europe Sub-Saharan Africa divisions are forecasted to jump 1.21% and 4.61%, respectively. Quaker Foods North America is expected to increase 0.81% while the Latin America segment should see a 3% gain. The Asia, Middle East and North Africa division is anticipated to grow a moderate 0.5%.

Looking ahead to our full fiscal 2019 estimates, Pepsi’s bottom line is forecasted to slip 2.65% to $5.51 per share while net sales is projected to come in at $66.5 billion. The Europe Sub-Saharan Africa and Frito Lay North America segments are expected to lead the top-line growth in fiscal 2019, with respective gains of 4.76% and 4.59%.

Bottom Line

Pepsi’s announcement tomorrow will be closely watched by Wall Street as investors look for any indications of what might be ahead not only for Pepsi but for the Q3 earnings season as a whole. Pepsi’s robust top-line growth is projected to continue in Q3, but its bottom-line struggles are also predicted to continue.

The company is planning to ramp up spending in a few places over the next six months, including marketing support for its brands, and investments in upgrading manufacturing. However, the firm reported that the spending is expected to continue to weigh on earnings until 2020 at the earliest. Estimate revisions have trended lower for Q4 and beyond, giving Pepsi a Zacks Rank #4 (Sell).

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