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PepsiCo: Softer Growth and a Lower EPS in Q3?

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  • PepsiCo is scheduled to announce its third-quarter results on Thursday.
  • The company’s revenues will likely benefit from higher pricing. However, the EPS might continue to fall.

PepsiCo (PEP) is scheduled to report its third-quarter results on Thursday. The company’s revenues might continue to gain from its higher pricing and mix. However, tough YoY (year-over-year) comparisons and higher business reinvestments could drag the company’s earnings down.

Notably, PepsiCo left its fiscal guidance unchanged despite its stronger-than-expected performance in the first half of the year. The unchanged outlook indicates that the growth pace could decelerate sequentially in the second half of the year. PepsiCo expects the YoY comparisons to be more challenging in the second half of the year on the organic revenues front. Besides, the reinvestment pace in the business will likely accelerate in the second half of the year, which would impact the core EPS.

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We think that PepsiCo’s organic sales growth could decelerate sequentially. In the first half of the year, the company’s organic sales rose 4.8%. The organic sales will likely soften in the second half of the year. However, the pricing, product mix, and a slight improvement in volumes could continue to support the company’s underlying sales. Moreover, pressure on the company’s margins due to higher commodity costs will likely ease, which would support the bottom line.

PepsiCo’s recent past and near future

During the last reported quarter, PepsiCo beat analysts’ expectations both on the revenues and core earnings front. The company’s better-than-expected performance was due to strong organic sales growth led by growth across all of the operating segments.

PepsiCo’s core EPS beat analysts’ expectations. However, the EPS fell on a YoY basis, which reflected higher commodity costs and strategic reinvestments in the business.

In the third quarter, analysts expect PepsiCo to post revenues of $16.93 billion, which implies growth of 2.7% YoY. The company’s Frito-Lay North America segment will likely sustain the momentum and support overall revenue growth. However, the growth pace could soften.

Meanwhile, the higher net price realization might drive the organic sales growth in the PepsiCo Beverages North America segment. However, the segment’s volumes might stay low, which would reflect weakness in carbonated soft drink volumes.

The organic revenues in developing and emerging markets might continue to grow. China, India, Mexico, and Brazil could post healthy gains due to increased investments and portfolio expansion. Meanwhile, the Quaker segment’s revenues could benefit from higher pricing and modest volume gains.

We expect the margin pressure to ease a bit, which would reflect moderating commodity costs. However, the bottom line might continue to decline. Analysts expect PepsiCo to post a core EPS of $1.50, which represents a decline of 5.7% YoY.

Will PepsiCo’s earnings drive its shares?

PepsiCo has risen 24.1% on a YTD (year-to-date) basis as of September 30. The uptrend in PepsiCo stock reflects the positives. We think that better-than-expected third-quarter results could drive PepsiCo stock higher. However, the upside might be limited due to the projected deceleration in the growth rate in the near term.

Analysts have a consensus target price of $135.15 on PepsiCo stock, which is marginally below its closing price of $137.10 on September 30.

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