Can Cost Saving Plans Boost PepsiCo's (PEP) Q4 Earnings?

PepsiCo, Inc. (NASDAQ:PEP) is set to report fourth-quarter 2017 results on Feb 13, before market open. Last quarter, the company delivered a positive earnings surprise of 4.23%. The company also surpassed expectations in each of the trailing four quarters, the average beat being 4.72%.

Let’s See How Things are Shaping Up for Q4

Health awareness has been the prime concern for consumers in recent times and capitalizing on this trend can prove to be beneficial for any beverage company. Keeping this in mind, PepsiCo is gradually reshuffling its portfolio toward healthier Everyday Nutrition Products. The company believes that such products will play an important role in the long-term growth.

PepsiCo has delivered revenue growth in the past three quarters, banking on significant innovation, higher pricing continued momentum in Frito-Lay business, revenue management strategies, along with better market execution.

Consumer taste is rapidly shifting from carbonated soft drinks (CSDs) to non-carbonated beverages. Hence, sluggish CSD volumes are the pressing concerns for this beverage giant as well as other non-alcoholic beverage companies.

If we look back at PepsiCo’s Q3 revenue performance, it grew 1.3% to $16.2 billion in the quarter, driven by higher pricing. The company’s organic revenue grew 1.7%. Notably, organic sales growth was softer than the 3.1% rise recorded in the previous quarter. Although foreign exchange (Fx) hurt revenue growth by 1%, pricing had a positive impact of 3%. Total volume declined 1% during the quarter against flat growth in the previous quarter.

The company’s total revenues increased 1.7% for the first nine months of 2017. This reflects improvement from the 2.7% decline in the year-ago period, banking on innovations and better market execution. However, organically, revenues grew 2.3% in the first three quarters of 2017, against 3.7% growth in the year-ago period.

Segment Discussion

North America Beverages or NAB business (includes beverage businesses in the United States and Canada) accounts for about 32.8% of PepsiCo’s total revenues. Revenues at the segment declined 3% in the third quarter and remained unchanged in the first three quarters of 2017. The trend is expected to continue in the to-be-reported quarter. For the fourth quarter, the Zacks Consensus Estimate for NAB segment revenues is pegged at $5.96 billion, implying a 5.2% decline.

For Frito-Lay North America or FLNA business (accounting for 23.3% of revenues), the company had a good balance of volume growth, net price realization and operating margin expansion. The segment revenues increased 3% in both the third quarter and the nine-month period. The trend is expected to persist in the to-be-reported quarter, with revenues likely to improve 26.7%, sequentially per the consensus estimate. However, revenues at FLNA are expected to decrease 1.7% on a year-over-year basis.

Quaker Foods North America segment revenues increased 1% in the third quarter but decreased 1% in the first nine months of 2017. The Zacks Consensus Estimate for the segment revenues is pegged at $775 million, implying a 4.9% decline.

Europe Sub-Saharan Africa segment revenues grew 8% in the third quarter and 7% in the first nine months of 2017. The Zacks Consensus Estimate for the segment revenues is pegged at $3.6 billion, implying an 8.1% increase. Latin America segment revenues grew 6% in the prior quarter as well as in the first nine months of 2017. The Zacks Consensus Estimate for the segment revenues is pegged at $2.4 billion, implying a 6.2% increase.

Asia, Middle East and North Africa segment revenues decreased 4% in the third quarter and 7% in the first nine months of 2017. However, the segment revenues are likely to improve by just 0.4% in the to-be-reported quarter, per the consensus estimate.

Overall, for the fourth quarter, the Zacks Consensus Estimate for PepsiCo’s total revenues stands at $19.4 billion, implying a 0.4% year-over-year decrease.

Let us delve deeper into other factors likely to impact PepsiCo’s fourth-quarter performance:

Coming to the company’s margins, PepsiCo had earlier indicated that as the commodity inflation is expected to continue in 2017, the company’s gross margin might face some pressure in the to-be-reported quarter.

Notwithstanding the above-mentioned concerns, the company beat expectation in the last seven quarters. The company’s productivity programs will likely support its core operating margin expansion. PepsiCo’s productivity programs are on track to achieve annual $1 billion target.

For the fourth quarter, the Zacks Consensus Estimate for earnings stands at $1.30, reflecting an 8.3% year-over-year increase.

Quantitative Model Prediction

Here is what our quantitative model predicts:

PepsiCo does not have the right combination of the two key ingredients — a positive Earnings ESP and a Zacks Rank #3 (Hold) or higher — to increase the odds of an earnings beat.

You can uncover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

Zacks ESP: PepsiCo has an Earnings ESP of -0.09%.

Zacks Rank: PepsiCo carries a Zacks Rank #3, which increases the predictive power of ESP. However, we also need to have a positive ESP to be confident of an earnings surprise.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Pepsico, Inc. Price and EPS Surprise

Pepsico, Inc. Price and EPS Surprise | Pepsico, Inc. Quote

Stocks to Consider

Here are some consumer staples stocks that you may want to consider, as our model shows they have the right combination of elements to post an earnings beat this quarter.

Coca-Cola European Partners PLC (NYSE:CCE) has an Earnings ESP of +1.28% and a Zacks Rank #3. The company is scheduled to report quarterly numbers on Feb 15.

Campbell Soup Company (NYSE:CPB) has an Earnings ESP of +1.44% and a Zacks Rank #3. The company is scheduled to report quarterly numbers on Feb 16.

Cott Corporation (NYSE:COT) has an Earnings ESP of +233.33% and a Zacks Rank #3. The company is slated to report earnings results on Mar 1.

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