PepsiCo (PEP) 1st Quarter Earnings: What to Expect

With some an estimated $10 billion of operating profit in its recent fiscal year, you would be hard-pressed to find a better-performing retail stock than PepsiCo (PEP), especially one that pays a healthy dividend of 3.05% — more than a full point above the S&P 500 index.

The snack and beverage giant will report first quarter fiscal 2019 earnings results before the opening bell Wednesday. And although the shares, which have risen about 10% year to date have rebounded nicely from their December slump, I still don’t believe they reflect the real underlying strengths of the business, particularly when compared to rivals Coca-Cola (KO) and Monster Beverage (MNST).

Although Pepsi possesses, arguably, stronger portfolio of brands than the aforementioned competitors, the company is adjusting to consumers’ need for healthier beverage choices with low salt, low sugar, and more natural ingredients. On Wednesday the company must address fears about its growth drivers, while delivering strong organic sales and the type of guidance that suggests confidence about its long-term growth position.

For the three months that ended March, Wall Street expects the company to earn 92 cents per share on revenue of $12.7 billion. This compares to the year-ago quarter when earnings came to 96 cents per share on $12.56 billion in revenue. For the full year, ending in December, earnings of $5.51 per share would decline 2.6% year over year, while full-year revenue of $66.28 billion would rise 2.5% year over year.

The main question for investors on Wednesday will be to what extent can revenue continue to rise? So far the company is meeting that challenge as evidenced by its better-than-expected Q4 results, which were driven by demand for its teas, Gatorade and namesake cola. The company has also benefited from strong revenues and operating profit growth at its Frito-Lay North America segment.

Although the top-line is expected to remain weak for much the year, Wall Street would applaud any uptick in organic growth — those not driven by acquisitions. That, combined with sequential revenue gains in the North America Beverages business and improvements in international divisions, particularly in developing and emerging markets, would be seen as significant improvement.

Finally, on Wednesday investors and analysts will get a full picture of what 2019 will look like. The company projects long-term organic revenue growth of 4% to 6%, while core operating margin expansion should be between 20 to 30 basis points. Further, Pepsi is forecasting productivity savings of at least $1 billion annually over the next four years, which is higher than the $1 billion annual savings it projected through 2019.

In particular, analysts will look to see whether these improved trends can continue and to what extent the management is serious about splitting off the company. Meanwhile, from a valuation perspective, the stock is attractive as part of a long-term core portfolio. I expect the shares to reach $135 within the next 12 to 28 months, driven by productivity savings and a boost to EPS.

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.

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