Will Cost-Saving Plans Boost PepsiCo's (PEP) Q1 Earnings?

PepsiCo, Inc. (NASDAQ:PEP) is set to report first-quarter 2018 results on Apr 26, before market open. Last quarter, the company delivered a positive earnings surprise of 0.77%. The company also surpassed expectations in each of the trailing four quarters, with the average being 4.05%.

Let’s See How Things are Shaping Up for Q1

Sluggish CSD (carbonated soft drinks) volumes are the pressing concerns for this beverage giant as well as other non-alcoholic beverage companies. PepsiCo’s CSD volumes declined 5% in 2017 in the North America Beverages business.

Consumer taste is rapidly shifting from CSDs to non-carbonated beverages. Keeping this in mind, PepsiCo is gradually reshuffling its portfolio toward healthier alternatives. To this end, the company has stepped up its innovation efforts and investments toward e-commerce, R&D and social/digital marketing/design for enhancing its top line.

PepsiCo has delivered organic revenue growth in the past four quarters, banking on significant innovation, revenue management strategies, along with better market execution.

If we look back at PepsiCo’s Q4 performance, the company’s total organic revenue growth was modest at 2.3%, driven by 2% pricing on 2% volume growth in food/snacks, offset by a 2% volume decline in beverages. However, its total revenues remained unchanged from the year-ago level.

Notably, results of North America Beverages (NAB) segment — comprising beverage businesses in the United States and Canada — remained soft in Q4. The company’s NAB segment was negatively impacted by higher input costs, operating cost inflation and restructuring charges that substantially offset productivity gains. Moreover, the 53rd reporting week in the prior year and hurricane-related costs also added to the woes. Organic sales and beverage volumes were down 3% and 2%, respectively, in the quarter.

Segment Discussion

North America Beverages or NAB business (which includes beverage businesses in the United States and Canada) accounts for about 33% of PepsiCo’s total revenues. Revenues at the segment declined 6% in the fourth quarter, 3% in the third quarter and remained unchanged in the first two quarters of 2017. The trend is unlikely to reverse in the to-be-reported quarter as well. For the first quarter, the Zacks Consensus Estimate for NAB segment revenues is pegged at $4.39 billion, implying a decline from $$5.9 billion in Q4 and $4.46 billion in the year-ago quarter.

For Frito-Lay North America or FLNA business (accounting for 25% of revenues), the company had a good balance of volume growth, net price realization and operating margin expansion. However, the segment’s revenues decreased 1% last quarter but increased 2% in 2017. The Zacks Consensus Estimate for the segment revenues is pegged at $3.64 billion, implying a decline from $4.83 billion in the prior quarter but an increase from $3.5 billion in the year-ago period.

Quaker Foods North America segment revenues decreased 5% in the fourth quarter and 2% in 2017. The Zacks Consensus Estimate for the segment revenues is pegged at $605 million versus $774 million in the fourth quarter and $598 million in the first quarter of 2017.

Europe Sub-Saharan Africa segment revenues grew 11% in the fourth quarter and 8% in 2017. The Zacks Consensus Estimate for the segment revenues is pegged at $1.6 billion, implying an increase from $1.4 billion in the prior-year period but a decrease from $3.7 billion last quarter.

Latin America segment revenues grew 6% in the prior quarter as well as 2017. The Zacks Consensus Estimate for the segment revenues is pegged at $1.1 billion compared with $1.1 billion in the first quarter of 2017 and $$2.4 billion in the fourth quarter.

Asia, Middle East and North Africa segment revenues remained unchanged year over year in the fourth quarter but decreased 5% in 2017. The segment’s revenues are likely to improve to $1 billion in the first quarter of 2018 from $970 million registered in the year-ago period, per the consensus estimate. However, it is likely to decline from $1.9 billion in the prior quarter.

Overall, for the first quarter, the Zacks Consensus Estimate for PepsiCo’s total revenues stands at $12.4 billion, implying a 3% year-over-year increase.

Other Factors to Influence PepsiCo’s First-Quarter Performance:

Coming to the company’s margins, PepsiCo had earlier indicated that as commodity inflation is expected to continue in 2018, the company’s gross margin might face some pressure in the to-be-reported quarter.

Notwithstanding the above-mentioned concerns, the company beat expectations in the last eight 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 first quarter, the Zacks Consensus Estimate for earnings stands at 92 cents, reflecting a 2.1% year-over-year decrease.

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 -0.97%.

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.

Pepsico, Inc. Price and EPS Surprise

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

Stocks to Consider

Here are a few companies in the Zacks Consumer Staples sector that can be considered, as our model shows that they have the right combination of elements to post an earnings beat in their upcoming releases.

The Boston Beer Company, Inc. (NYSE:SAM) has an Earnings ESP of +35.65% and a Zacks Rank #3. The company is slated to report quarterly results on Apr 25.

The Hershey Company (NYSE:HSY) has an Earnings ESP of +0.65% and a Zacks Rank #3. The company is scheduled to report quarterly results on Apr 26. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Hormel Foods Corporation (NYSE:HRL) has an Earnings ESP of +0.90% and a Zacks Rank #3. The company is expected to report quarterly numbers on May 24.

Today's Stocks from Zacks' Hottest Strategies

It's hard to believe, even for us at Zacks. But while the market gained +21.9% in 2017, our top stock-picking screens have returned +115.0%, +109.3%, +104.9%, +98.6%, and +67.1%.

And this outperformance has not just been a recent phenomenon. Over the years it has been remarkably consistent. From 2000 - 2017, the composite yearly average gain for these strategies has beaten the market more than 19X over. Maybe even more remarkable is the fact that we're willing to share their latest stocks with you without cost or obligation.

See Them Free>>