Markets
KO

KO vs. PEP: Which Stock is Poised for Better Q1 Earnings?

We are in the thick of the Q1 earnings season, with results seemingly on solid ground given impressive top and bottom-line growth rates. Notably, the above-average proportion of positive earnings surprises is quite palpable.

According to our latest Earnings Preview, results of 87 S&P 500 members are already out. As of Apr 20, 2018, total earnings for these S&P 500 members are up 25% year over year on 10.7% higher revenues. Of these, 82.8% surpassed earnings estimates, while 67.8% beat revenue expectations.

A Look at the Soft Drink Industry

Sluggish CSD (carbonated soft drinks) volumes are the pressing concerns for the soft drinks giants, PepsiCo, Inc.PEP and The Coca-Cola CompanyKO as well as other non-alcoholic beverage companies. Sales for both the beverage giants have remained subdued in the recent quarters.

PepsiCo's shares have dipped approximately 10.5% in the past year while that of Coca-Cola's gained 0.9%, against the industry 's 1% decline.

However, the two behemoths have vowed to find ways of diversifying their portfolio beyond carbonated soft drinks and revamping existing product lines.

Let's have a sneak peek at the two major soft drink stocks scheduled to report earnings this week, to find out how things are shaping up before the announcement.

Coca-Cola is set to report first-quarter 2018 results on Apr 24, 2018 before the opening bell.

The company has been witnessing a decline in revenues for the last 11 quarters, primarily due to structural changes and weak volumes especially in the sparkling beverage category.

Last quarter, Coca-Cola's revenues declined 20% year over year due to the negative impact of structural items. Organically, revenues increased 6%. Acquisitions/divestitures and structural items had a 26% impact on revenues. This time again, the company expects the same degree of adverse impact on net revenues from acquisitions, divestitures and other structural items. Moreover, the first quarter will have one less day than the same period last year. However, the company expects currency to have a positive impact on quarterly net revenues by 2%. Again, revenues will be positively impacted by 1% from Accounting Standards Update 2014-09.

Precisely, revenues of the company's North America segment, comprising about 30% of its top line, are expected to witness growth in the first quarter. Last quarter, the North America segmental revenues totaled $2.62 billion last quarter, increasing 6% year over year on 2% growth in price/mix. Organically, revenues rose 3% in the quarter while unit case volume grew 1%. Price/mix increased on the company's disciplined approach to occasion, brand, price and package strategy, as well as positive business and category mix.

Though Coca-Cola has increased its marketing investments, and is driving package and product innovations to boost its carbonated beverage business, these efforts are yet to show meaningful results with the trend unlikely to change in the first quarter as well.

The Zacks Consensus Estimate called for Coca-Cola's North American segmental revenues of $2.49 billion, reflecting an increase from $2.39 billion a year ago but a decline from $2.62 billion in the prior quarter.

Overall, the beverage behemoth's first-quarter revenues are likely to decline on structural changes. For the first quarter, the Zacks Consensus Estimate for revenues stands at $7.43 billion, implying an 18.6% year-over-year decline.

That said, we feel pricing gains, cost cuts and productivity savings should continue to support the bottom line of the company to some extent. For the first quarter, the Zacks Consensus Estimate for earnings is pegged at 46 cents a share, reflecting an increase of 7% year over year.

Meanwhile, our proven model hints at an earnings beat for the company this quarter, as Coca-Cola has an Earnings ESP of +0.24% and Zacks Rank #2 (Buy). You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks here .

(Also Read: Will Cost Cut, Innovations Drive Coca-Cola Q1 Earnings? )

Coca-Cola Company (The) Price and EPS Surprise

Coca-Cola Company (The) Price and EPS Surprise | Coca-Cola Company (The) Quote

PepsiCo is scheduled to report first-quarter 2018 numbers before the opening bell on Apr 26. The company's CSD volumes declined 5% in 2017 in the North America Beverages (NAB) business.

Notably, results of NAB segment - comprising beverage businesses in the United States and Canada - remained soft in the last reported quarter. Results were negatively impacted by higher input costs, operating cost inflation and restructuring charges that substantially offset productivity gains. Moreover, the 53rd reporting week in the prior year and hurricane-related costs also added to the woes. Organic sales and beverage volumes were down 3% and 2%, respectively, in the quarter.

That said, the company is speeding up its innovation and investments toward e-commerce, R&D and social/digital marketing/design to enhance its top line. PepsiCo has delivered organic revenue growth in the past four quarters, banking on significant innovation, revenue management strategies, along with better market execution. The company's total organic revenue growth was modest at 2.3% last quarter, driven by 2% pricing on 2% volume growth in food/snacks, offset by a 2% volume decline in beverages. However, its total revenues remained unchanged from the year-ago level.

Apart from revenues, commodity inflation is expected to create pressure on PepsiCo's gross margin in the to-be-reported quarter. That said, its productivity programs will likely support its core operating margin expansion to some extent.

Overall, the Zacks Consensus Estimate for first-quarter earnings of 92 cents implies a year-over-year decline of 2.1%. The same for revenues is pegged at $12.41 billion, 3% higher than the prior-year quarter figure.

Meanwhile, our proven model does not conclusively show that PepsiCo is likely to beat earnings this quarter as it does not possess the key components. For the impending quarter, the company has an Earnings ESP of -0.97%. The company has Zacks Rank #3 (Holds), making an earnings prediction uncertain.

You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .

(Read More: Will Cost-Saving Plans Boost PepsiCo's Q1 Earnings? )

Pepsico, Inc. Price and EPS Surprise

Pepsico, Inc. Price and EPS Surprise | Pepsico, Inc. Quote

Our Take

Earnings beat for PepsiCo remains uncertain, while Coca-Cola is expected to register a positive earnings surprise. Coca-Cola has delivered a positive earnings surprise in three of the trailing four quarters, with the average beat being 1.48%. On the other hand, PepsiCo surpassed expectations in each of the trailing four quarters, with the average being 4.05%.

From the sales growth perspective, PepsiCo is well positioned to report better quarterly results.

Meanwhile, PepsiCo is likely to witness a decline in earnings. However, it is expected to witness earnings growth.

Today's Stocks from Zacks' Hottest Strategies

It's hard to believe, even for us at Zacks. But while the market gained +21.9% in 2017, our top stock-picking screens have returned +115.0%, +109.3%, +104.9%, +98.6%, and +67.1%.

And this outperformance has not just been a recent phenomenon. Over the years it has been remarkably consistent. From 2000 - 2017, the composite yearly average gain for these strategies has beaten the market more than 19X over. Maybe even more remarkable is the fact that we're willing to share their latest stocks with you without cost or obligation.

See Them Free>>

Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report

Coca-Cola Company (The) (KO): Free Stock Analysis Report

Pepsico, Inc. (PEP): Free Stock Analysis Report

To read this article on Zacks.com click here.

Zacks Investment Research

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

In This Story

KO PEP

Other Topics

Earnings Stocks