This morning, PepsiCo (PEP) essentially launched earnings season by releasing their results for the recent quarter. As storm clouds gather over the markets in so many ways, PepsiCo is being seen as offering a ray of sunshine by beating on top and bottom lines and raising their guidance. But how much does this foreshadow the upcoming earnings season? Are corporations going to prove their resiliency once again, and demonstrate increased profitability, regardless of issues like geopolitical crises, dysfunction in Washington, rising interest rates, record high debt to GDP in the U.S., and all these other potential problems? Or is this just a Pepsi thing?
There is definitely a “Pepsi thing” element to it. The company is simply being run better than it has recently. That is obvious from the fact that their beat on EPS, $2.25 versus an expected $2.15, was significantly greater than on revenue, $23.45 billion versus $23.39 billion. This is a story of better-than-expected profitability rather than sales. In fact, their overall product volume, which strips out currency fluctuations and the impact of pricing, actually dropped last quarter. Basically, Pepsi made more money on lower volume, so clearly their ability to raise prices without too much damage to sales and some internal improvements in efficiency were responsible.
The remarkable thing about these earnings is that they go so much against the conventional wisdom around Pepsi going in. There was a belief that the popularity of various weight loss drugs and the tighter conditions for consumers would hurt them, hence the stock has been in collapse mode, and hit a 52-week low on Friday:
Given that recent weakness, a roughly 2% pop in the stock at the opening after those fears were allayed is actually somewhat disappointing. That is presumably a function of traders’ awareness of all the actual and potential problems listed above but the question remains: do PEP’s results give us hope that earnings can come to the rescue for the markets as a whole?
I found that doubtful, but what those earnings can do is give us a clue what to expect from at least some others. Big companies with strong brands, and thus a large amount of pricing power, will be okay. Pepsi spent Q3 playing catchup, raising prices to offset inflationary pressures, and other similar companies presumably did the same. However, the overall drop in volume is somewhat worrying and may be more indicative of what is to come than is a bottom line beat.
Conditions are tightening, and there is a legitimate fear that what we are seeing now is just the beginning. As I said yesterday, the declaration of war by Israel is not, in itself, a reason to sell stocks. We have already seen that with Russia’s invasion of Ukraine, but there are several other potential geopolitical flashpoints. North Korea is always a problem, as is the China/Taiwan situation. And while the dispute between India and Pakistan receives less publicity here in the U.S., it, like the Middle East conflict, is a long running, historical land dispute with tribal and religious undertones that has flared into real violence on multiple occasions.
Then there is the domestic debt situation. The government debt-to-GDP ratio hit a high during the pandemic at around 133% but was at all-time high levels just before that and has stayed at a non-crisis high of around 120% since.
That is a problem on many levels, but there is no end in sight. The election next year is looking like it will give voters a choice between Trump, who just about doubled the deficit as a percentage of the economy from 2016 to 2019 by cutting taxes and not spending, and Biden, who hasn’t yet met a spending bill he didn’t like. There are some tough fiscal decisions to be made, and that will take politicians of character and integrity, something that seems to be in very short supply right now.
The bright spot here is exactly what Pepsi showed this morning. The strength of America has been built on the ingenuity, adaptability, and resilience of its people and its corporations, and that still remains. We can be thankful for that and take comfort in the fact that those qualities mean that America will survive whatever comes, but it would be a mistake to look at Pepsi’s earnings and say that clear skies for the markets are ahead.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Martin Tillier
Martin Tillier spent years working in the Foreign Exchange market, which required an in-depth understanding of both the world’s markets and psychology and techniques of traders. In 2002, Martin left the markets, moved to the U.S., and opened a successful wine store, but the lure of the financial world proved too strong, leading Martin to join a major firm as financial advisor.
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