Consumer defensive stocks have been safe havens as investors rushed them into during the market correction, which punished high-growth stock like technology. One the names that has caught my attention is PepsiCo (PEP).
The snack and beverage giant will report second quarter fiscal 2022 earnings results after the closing bell Monday. Although Pepsi stock has declined about 2% year to date, it has significantly outperformed the 19% drop in the S&P 500 index. What’s more, the stock is still up more than 14% over the past year, while the S&P 500 has declined 11%. Investors are seemingly more optimistic about the company’s ability to navigate supply chain headwinds to produce not only rapid organic sales growth, but also strong free cash flow.
That level of outperformance is poised to continue based on recent commentary from management, which still believes that there is plenty of room for growth in its core snacks and beverages business. The company’s investments in new brands and adapting to new trends has begun to pay dividends, as evidenced by the 6% rise in organic revenue growth in the first quarter, during which organic revenue rose 13% in North America and 14% higher for Frito-Lay North America. Volume was also 6% higher for beverages.
What’s more, unlike some of its rivals such as Coca-Cola (KO) and Keurig Dr. Pepper Snapple (KDP), Pepsi's diversified food and beverage portfolio, which includes prepared-food brands such as Quaker Foods and Rice-A-Roni, continues to be a notable asset. Unit volume remains strong in the food/snacks businesses, rising by mid-single digits over the past several quarters. On Monday Pepsi will need to demonstrate that these investments will continue to pay dividends.
For the three months that ended June, Wall Street expects the company to deliver EPS of $1.74 per share on revenue of $19.49 billion. This compares to the year-ago quarter when earnings were $1.72 per share on $19.22 billion in revenue. For the full year, ending in December, earnings of $6.66 per share would increase 6.38% year over year, while full-year revenue of $82.72 billion would rise about 4% year over year.
Aside from rising core gross margin and operating efficiencies, Pepsi has gained market share in several key categories. Not only has the company grown in share in juices and juice drinks, Pepsi has also taken share in sparkling water categories, as well as ready-to-drink tea and coffee beverages. These were highlighted in the first quarter when it beat on both the top and bottom lines, reporting Q1 adjusted EPS of $1.29 per share, beating the $1.23 expected, while Q1 revenue of $16.02 billion grew 9% year over year, topping Street estimates by $655 million.
Organic revenue, which strips out the impact of foreign currency, acquisitions and divestitures, rose by 13.7% in Q1, thanks to a 22% rise in Latin America and 18% rise in the Africa, Middle East and South Asia region. As noted, the impressive part of the quarter was the 13% organic rise in North American beverage revenue. And management suggested there is no sign on slowing down, upping full-year organic revenue to increase 8% compared to the prior forecast for 6% growth. The company also guided full-year year revenue of $85.83 billion, higher than the prior forecast $84.3 billion.
Combined with productivity savings, lower advertising and marketing expenses, Pepsi now expects constant currency EPS to increase 8%. Given these strong operating trends, it would be a mistake to part with Pepsi stock at current levels.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
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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