Pepsi (PEP) Tops Q3 Earnings & Revenues, Lifts EPS Outlook

PepsiCo, Inc. (NYSE:PEP) reported better-than-expected third-quarter 2016 results (ending Sep 3), with earnings and revenues beating the Zacks Consensus Estimate.

Moreover, this Purchase, NY-based food/beverage giant raised its full-year earnings growth guidance.

Earnings

PepsiCo’s third-quarter core earnings per share (EPS) of $1.40 beat the Zacks Consensus Estimate of $1.32 by 6.1%.

Earnings rose 4% year over year despite the adverse impact of currency headwinds on sales. Also, currency hurt earnings by 3%. In constant currency terms, adjusted earnings grew 7% on strong margins and decent sales growth.

Notably, core earnings exclude restructuring and impairment charges and also commodity mark-to-market net impact. Including this item, reported earnings came in at $1.37 per share, up 282% year over year.

Sales

Total sales declined 2.7% year over year to $16.03 billion. Foreign exchange (Fx) hurt revenue growth by 4% while Venezuela deconsolidation had a 2.5% impact on sales. Revenues surpassed the Zacks Consensus Estimate of $15.89 billion by 0.9%.

Excluding the impact of Fx and Venezuela deconsolidation, revenues increased 4.2% on an organic basis driven by higher demand for beverages and Frito-Lay snacks in North America. Organic sales growth was higher than the 3.3% rise recorded in the previous quarter.

Total volumes grew 2%, same as the previous quarter. While organic snacks/food improved from the last quarter, growing 3%, beverage volumes were same as the last quarter, rising 2%.

Segment Details

Organic volumes grew 2% at the Frito-Lay segment, same as the last quarter. Organic volumes declined 2% in Quaker Foods, another American snacks business, against growth of 3% recorded in the previous quarter. Organic snacks volumes rose 3.5% in the Latin America segment and 10% in Asia, Middle East and North Africa (“AMENA”), both higher than the last quarter. Organic snacks volumes rose 3% in the Europe Sub-Saharan Africa (“ESSA”) segment, same as last quarter.

Organic beverage volumes rose 2% in ESSA, down than last quarter. It declined 3% in Latin America, worse than last quarter. In AMENA, beverage volumes remained stable at 5%. Beverage volumes grew 2% in the North Americas Beverages segment, higher than an increase of 1% in the previous quarter.

Margins

Core gross margins improved 50 basis points (bps), backed by effective revenue management strategies and productivity gains.

Core constant currency operating profit rose 2% despite the negative impact of Venezuela deconsolidation. Core operating margins rose 30 bps on higher gross margin gains.

Financials

Cash and cash equivalents were $10,256 million as of Sep 3, 2016, up from $9,096 million as on Dec 26, 2015. Long-term debt was $29,322 million at the quarter-end, up from $29,213 million as on Dec 26, 2015.

Net cash from operating activities were $6,595 million in the first nine months of 2016, down from $6,775 million a year ago.

2016 EPS View Up

Core earnings are expected to increase to $4.78 per share, higher than $4.71 expected previously.

Excluding headwinds from currency and structural changes, organic revenues are expected to rise 4%, excluding the impact of an extra week this year. Currency is projected to hurt revenues by 4%, while the 53rd week is expected to add 1% to sales.

Commodity inflation is expected in the low single-digit range (including the transaction-related Fx impact). Productivity savings are anticipated to be approximately $1 billion.

Also, management plans to return $7 billion to shareholders through dividends and share repurchases. Free cash flow is estimated to be more than $7 billion.

Zacks Rank & Key Picks

Pepsi carries a Zacks Rank #3 (Hold). Other beverage stocks worth considering are Dr Pepper Snapple Group, Inc. (NYSE:DPS) , Coca-Cola Amatil Limited (OTC:CCLAY) and Primo Water Corp. (NASDAQ:PRMW) , all with a Zacks Rank #2 (Buy). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

PEPSICO INC Price, Consensus and EPS Surprise

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