Trend in earnings
PepsiCo (PEP) has exceeded analysts’ earnings expectations for 11 straight quarters. The company’s 2018 third-quarter adjusted EPS increased 7.4% to $1.59, ahead of analysts’ expectations of $1.57. PepsiCo’s adjusted EPS growth was driven by lower taxes, partially offset by higher expenses. Analysts expect PepsiCo’s adjusted EPS to grow 13.7% to $1.49 in the fourth quarter.
Margins in the recent quarter
PepsiCo’s 2018 third-quarter gross margin declined about 30 basis points to 54.3%. PepsiCo’s operating margin declined to 17.3% in the 2018 third quarter compared to 18.0% in the 2017 third quarter. Higher commodity costs, an adverse mark-to-market net impact associated with commodity derivatives, higher transportation costs, and an increase in advertising and marketing expenses pulled down PepsiCo’s third-quarter margins.
2018 earnings expectations
Analysts expect PepsiCo’s adjusted EPS to rise 8.2% to $5.66 in 2018. Based on the guidance issued in October 2018, PepsiCo expects adjusted EPS of $5.65 in 2018 compared to $5.23 in 2017. PepsiCo’s guidance reflects growth of 8% in its 2018 adjusted EPS and takes into account a one-percentage-point adverse impact from currency fluctuations.
Higher revenue and lower taxes are expected to benefit the company’s top line. However, higher commodity costs and increased operating expenses, including rising freight costs are expected to put pressure on the company’s profitability. However, better pricing will likely mitigate the impact of rising costs.
Let’s look at analysts’ recommendations for PepsiCo stock in the next part of this series.