A month has gone by since the last earnings report for Pepsico, Inc.PEP . Shares have lost about 3% in that time frame.
Will the recent negative trend continue leading up to its next earnings release, or is PEP due for a breakout? Before we dive into how investors and analysts have reacted of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.
First-Quarter 2018 Results
PepsiCo reported first-quarter 2018 (ending Mar 24) results, with earnings and revenues beating the Zacks Consensus Estimate. Notably, this is the eighth consecutive quarter of positive earnings surprise for the company. The improvement was mainly attributable to strong performances in its international divisions, propelled by higher revenue growth in the developing and emerging markets.
PepsiCo's first-quarter core earnings per share (EPS) of 96 cents beat the consensus mark of 92 cents by 4.3% and increased 3% year over year. In constant currency terms, adjusted earnings remained unchanged from the year-ago period.
Core earnings exclude restructuring and impairment charges, and commodity mark-to-market net impact. The company reported earnings of 94 cents per share, reflecting an increase of 3% year over year. Foreign exchange translation had a positive impact of 2% on the reported EPS.
Net revenues of $12.56 billion increased 4.3% from the year-ago level. Foreign exchange (Fx) had a 2% negative impact on revenue growth and pricing had a positive impact of 2%. Reported revenues also topped the Zacks Consensus Estimate of $12.41 billion.
Excluding the impact of Fx, revenues increased 2.3% on an organic basis, primarily driven by higher demand for food/snacks in the Latin America, Asia, Middle East and North Africa (AMENA), Europe Sub-Saharan Africa (ESSA) and Frito-Lay North America (FLNA) segments. Notably, overall organic sales growth was the same as recorded in the fourth quarter.
Total volume grew 1% in the quarter, whereas volumes remained unchanged in the previous quarter. While organic snacks/food volumes increased 3% (better than 2% growth witnessed in the fourth quarter), beverage volumes dropped 1% (versus down 2%).
Quarterly Segment Details
Revenues decreased 1% at the North America Beverages (NAB) segment. That said, the company's revenues improved 15% in ESSA, 14% in Latin America, 7% in AMENA and 3% in FLNA segments. Meanwhile, revenues at QFNA remained unchanged in the quarter from the year-ago level.
Notably, the company's NAB segment was negatively impacted by higher input costs and operating cost inflation that substantially offset productivity gains. The results were also affected by a bonus, extended to certain U.S. employees in connection with the TCJ Act. Meanwhile, each headwind decreased the operating profit performance by 8%.
Operating profits (on a reported basis) decreased 23% in NAB and 5% in QFNA segments. However, the same grew 42% in Latin America, 23% in ESSA and 10% in AMENA segments. Meanwhile, operating profit remained unchanged at FLNA division.
Frito-Lay North America (FLNA): Revenues improved 3% year over year (up 6% organically) to $3.62 billion, driven by improved pricing and volume growth.
Volumes in trademark Doritos increased mid-single digits, Sabra joint venture products in double digit and mid-single digit in variety packs. These were partially offset by a low-single-digit decline in trademark Lay's.
Core constant currency operating profit remained unchanged from the year-ago level. Operating profit was impacted by operating cost increases, as well as a bonus extended to certain U.S. employees in connection with the TCJ Act. Additionally, higher commodity costs, primarily of potatoes and cooking oil, negatively impacted the results.
Quaker Foods North America (QFNA): Revenues improved marginally (unchanged organically) to $601 million from $598 million a year ago. The result reflects favorable foreign exchange as well as volume growth that were partly offset by unfavorable pricing. The volume growth was driven by mid-single-digit growth in oatmeal, partially offset by a double-digit decline in trademark Gamesa.
Core constant currency operating profit decreased 5% due to higher operating cost, and unfavorable pricing and mix. These were partly offset by planned cost reductions across a number of expense categories, and lower advertising and marketing expenses.
North America Beverages (NAB): Net revenues in this segment declined 1% year over year (down 2% organically) to $4.42 billion. The downside was mainly due to a decline in volume, partially offset by effective pricing. Acquisitions had a marginal positive contribution to the net revenues.
Volumes were down 2.5% due to a 4% decline in CSD volume and 1% decline in non-carbonated beverage volume. The non-carbonated beverage volume decreased mainly due to low-single-digit declines in Gatorade sports drinks, and juice and juice drinks portfolio, partially offset by a low-single-digit increase in the overall water portfolio. Acquisitions had a nominal positive contribution to the volume performance.
Core operating profit declined 22% in constant currency. Segment operating profit was affected by operating cost inflation as well as higher raw material costs, and a bonus extended to certain U.S. employees in connection with the TCJ Act.
Latin America: Revenues increased 14% to $1.22 billion. Organically, revenues grew 9%. The upside was mainly due to higher pricing and volume growth. Favorable currency translation also had a positive impact on revenues.
Snacks volume increased 3% that includes mid-single-digit growth in Brazil and low-single-digit growth in Mexico. Beverage volume declined 4%, reflecting a double-digit decline in Brazil, and mid-single-digit declines in Mexico and Chile. These were partly offset by low-single-digit growth in Argentina and Guatemala.
Core operating profit improved 17% year over year in constant currency, courtesy of productivity gains, lower restructuring charges and favorable foreign exchange, as well as insurance settlement recoveries related to the earthquake in Mexico in 2017
Europe Sub-Saharan Africa (ESSA): Net revenues grew 15% to $1.67 billion. Organically, revenues grew 6%. This is owing to favorable foreign exchange as well as volume growth. Snacks volume grew 6%, while Beverage volume increased 6% in the quarter.
Core operating profit grew 9% year over year in constant currency, as productivity gains were partially offset by higher commodity, operating and marketing costs.
Asia, Middle East & North Africa (AMENA): Net revenues improved 7% to $1.04 billion due to higher volumes. Organically, revenues grew 6% on improved volumes, partially offset by the impact of refranchising beverage business in Jordan, and sales and certain other taxes.
Snacks volume grew 7% while beverage volume improved marginally.
Core operating profit jumped 10% year over year, reflecting higher revenues and planned cost reductions across a number of expense categories.
Core gross margin and operating margin contracted 75 basis points (bps) and 110 bps, respectively.
Cash and cash equivalents were $13.4 billion as of Mar 24, 2018, up from $10.6 billion as of Dec 30, 2017. Long-term debt was $31.9 billion at the end of the quarter, up from $33.8 billion as of Dec 30, 2017.
Net cash used for operating activities was $1.3 billion in the quarter compared with $193 million in the year-ago period.
2018 Guidance Reaffirmed
PepsiCo expects full-year organic revenue growth (excluding headwinds from currency and structural changes) to be approximately in line with the 2017 growth rate of 2.3%. Currency is projected to have a neutral effect on the top and bottom lines of the company.
PepsiCo expects core EPS of $5.70, showing an expected growth rate of 9%. Also, management plans to return $7 billion to its shareholders, through dividends ($5 billion) and share repurchases ($2 billion). Free cash flow is estimated at around $6 billion.
How Have Estimates Been Moving Since Then?
In the past month, investors have witnessed a downward trend in fresh estimates. There have been seven revisions lower for the current quarter.
Pepsico, Inc. Price and Consensus
At this time, PEP has a poor Growth Score of F, a grade with the same score on the momentum front. The stock was allocated a grade of D on the value side, putting it in the bottom 40% for this investment strategy.
Overall, the stock has an aggregate VGM Score of F. If you aren't focused on one strategy, this score is the one you should be interested in.
Our style scores indicate investors will probably be better served looking elsewhere.
Estimates have been broadly trending downward for the stock and the magnitude of these revisions indicates a downward shift. Notably, PEP has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.
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