Pepsi (PEP) 4th Quarter Earnings: What to Expect

Pepsi - Shutterstock photo
Credit: Shutterstock photo

Snack and beverage giant Pepsi (PEP) will report fourth quarter fiscal 2019 earnings results before the opening bell Thursday. With reported Q3 organic revenue growth of 4.3%, you’re be hard-pressed to find a retail stock that is executing better than Pepsi.

The company continues to find ways to give consumers the healthy beverage and snack options that have become a necessity for those who are advocating for foods with low salt, low sugar, and more natural ingredients. These are a few reasons to be bullish on the stock which has responded, delivering returns of 14% and 8% in six months and thirty days, respectively.

The company on Thursday will need to plant more optimism about the sustainability of its growth drivers. Pepsi has done a solid job meeting its growth challenges evidenced by its better-than-expected Q3 results, which were driven by demand for its teas, Gatorade and namesake cola. But with the stock gaining more than 27% over the past year, valuation concerns have emerged. At around $145 per share, Pepsi stock is trading at 33 times its free cash flow for the trailing 12 months. The main question for investors is, can revenue continue to rise?

Analysts will look to see if Pepsi’s growth trends can continue, including its Frito-Lay North America business which grew 5.5% in the third quarter, driving total core gross margin rate to improve 90 basis points to 55.4%. Investors will also want to know what 2020 will look like, particularly as rivals Coca-Cola (KO) and Monster Beverage (MNST) are increasing their competitive positions.

For the three months that ended December, Wall Street expects the company to earn $1.45 per share on revenue of $20.23 billion. This compares to the year-ago quarter when earnings came to $1.49 per share on $19.52 billion in revenue. For the full year, earnings of $5.51 per share would decline 2.6% year over year, while full-year revenue of $66.79 billion would rise 3.3% year over year.

Although the top-line is expected to remain weak, Wall Street on Thursday would applaud any uptick in organic growth, which is defined as revenue growth not driven by acquisitions. Likewise, while the projected full-year 2.6% earnings decline for 2019 would be discouraging, Pepsi is projected to grow earnings 8% in 2020 to $5.95 per share. This means, as often the case, the company’s guidance for the fiscal year will be closely-watched.

In Q3 the company beat expectations on both the top and bottom lines, driven by a 1.5% rise in organic volume in terms of price increases. This underscore the strength of brands like Doritos and Lays which drove a 5.5% rise in organic revenue, faster than the 5% rise in Q2. And here’s the thing: the management had expected a slowdown. But the beverage side of the business wasn’t as bubbly as volume declined 1%. While overall organic sales growth was 3%, it trailed the 6% rise of Coca-Cola.

On Thursday, in addition to showing growth sustainability in snacks, Pepsi will need to show better results on the beverage side of the business. And while valuation concerns may impede the stock in the near term, Pepsi can allay concerns by guiding confidently about its long-term growth and competitive position.

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

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Richard Saintvilus

After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.

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