The soft drinks industry has been facing the brunt of changing consumer preferences for quite some time now. Consumers are particularly vigilant about the use of artificial sweeteners, high sugar content and related obesity concerns. Also, possible new taxes levied on sugar-sweetened beverages and growing regulatory pressure are affecting Carbonated Soft Drink (CSD) sales. The challenges in the CSD category have been felt by all major soft drink makers, leading to lower volumes and weak sales.
Changing demographics and purchasing behavior make it imperative for the beverage industry giants to reshape their product portfolio. Also, capitalizing on the growing health awareness among consumers can prove beneficial for beverage companies.
In line with this, PepsiCo, Inc. PEP has been broadening its beverage portfolio to include non-carbonated beverages to reduce the dependence on colas. Dr Pepper Snapple Group Inc. DPS and The Coca-Cola Company KO are also trying to reinvigorate its CSD category by coming up with healthier yet tastier alternatives.
Recently, PepsiCo reported third-quarter core earnings per share of $1.48, beating the Zacks Consensus Estimate by 4.2%. Core earnings grew 6% year over year, mainly on improved operating efficiency. In constant currency terms, adjusted earnings grew 7%. Total sales improved 1.3% year over year to $16.24 billion. Although foreign exchange hurt revenue growth by 1%, pricing had a positive impact of 3%.
Currently, the Zacks Soft Drinks Industry (part of the broader Consumer Staples sector) ranks among the top 41% signifying that stocks in this space is likely to benefit from favorable broader factors in the immediate future. Notably, total earnings for the broader Consumer Staples sector( are expected to increase 1.8% in Q3 compared with 5.2% in the preceding quarter. Revenues are also expected to improve 1.8% (1.2% growth in Q2).
Let us take a look at how the following soft drinks companies are placed ahead of their third-quarter release on Oct 25.
Coca-Cola's third-quarter revenues/profits will likely decrease owing to structural changes and currency headwinds. We feel pricing gains, cost cuts and productivity savings should continue to drive the bottom line. The refranchising efforts, which are hurting sales/profits in the near term, will result in higher operating margins, lower capital spending and improved return on invested capital over the long term by reducing exposure to the low-margin bottling operations.
The company expects third-quarter revenues to decline 19-20% owing to acquisitions, divestitures and other structural items. The company also expects currency headwinds to hurt quarterly net revenues by 1-2%.
For the third quarter, the Zacks Consensus Estimate for earnings is pegged at 49 cents, reflecting a 0.7% year-over-year decrease. Meanwhile, the Zacks Consensus Estimate for total revenues is pegged at $8.84 billion, implying a 16.9% decline.
Nevertheless, our proven model hints at an earnings beat for this company this quarter, as Coca-Cola has the right combination of the two key ingredients - a positive Earnings ESP (+0.17) and a Zacks Rank #2 (Buy). You can uncover the best stocks to buy or sell before they're reported with our Earnings ESP Filter .
(Read more: Weak Sales Likely to Dampen Coca-Cola's (KO) Q3 Earnings ).
Coca-Cola Company (The) Price and EPS Surprise
Dr Pepper expects the default by a resin supplier to its operations in Mexico to affect its 2017 operating income by approximately $7-$9 million or 3 cents per share, the impact of which will be felt more in the third quarter of 2017. The Zacks Consensus Estimate for third-quarter earnings is pegged at $1.15, reflecting a decline of 1.8% year over year.
Apart from the default, the hurricanes in the United States and the earthquake in Mexico impacted Dr Pepper's operations.
Also, sluggish carbonated beverages (comprise around 82% of its business) volume trends are hurting carbonated beverages (CSD) category growth for quite some time now. The Zacks Consensus Estimate for CSD volume growth is projected at a meager 0.02% for the third quarter, less than 3% growth reported last quarter and 2% in the prior-year quarter.
Our proven model does not conclusively hint at an earnings beat for this company this quarter, as Dr Pepper does not have a positive Earnings ESP and a Zacks Rank #3 or higher. The Earnings ESP for Dr Pepper is -0.10% and carries a Zacks Rank #4 which further lowers the possibility of an earnings surprise.
(Read more: Will Resin Supply Default Hurt Dr Pepper's Q3 Earnings? ).
Dr Pepper Snapple Group, Inc Price and EPS Surprise
Today's Stocks from Zacks' Hottest Strategies
It's hard to believe, even for us at Zacks. But while the market gained +18.8% from 2016 - Q1 2017, our top stock-picking screens have returned +157.0%, +128.0%, +97.8%, +94.7%, and +90.2% respectively.
And this outperformance has not just been a recent phenomenon. Over the years it has been remarkably consistent. From 2000 - Q1 2017, the composite yearly average gain for these strategies has beaten the market more than 11X over. Maybe even more remarkable is the fact that we're willing to share their latest stocks with you without cost or obligation.