PEP Earnings Preview: Analysts cautious ahead of report
AInvestMonday, Oct 7, 2024 3:27 pm ET
3min read
PEP --

PepsiCo (PEP) is scheduled to report its Q3 earnings on October 8, 2024, before the market opens, with an earnings call to follow at 8:15 AM ET. Analysts are expecting adjusted EPS of $2.29, which would mark a 2% year-over-year increase, and revenue growth of around 2% to $23.86 billion. Historically, PepsiCo has a strong track record of beating EPS estimates, with seven out of the last ten quarterly reports leading to a positive market reaction. The focus will be on whether the company can continue this trend, especially with recent headwinds affecting its North American operations and international footprint.

Key metrics to watch in PepsiCo's Q3 report will include volume trends in its core North American market, particularly within its Frito-Lay and Quaker segments. Frito-Lay's performance has been under pressure, with volumes dropping by 4% in the last quarter, while Quaker saw a more severe 17% decline. Any signs of improvement or further deterioration in these areas will be critical for assessing PepsiCo’s ability to stabilize its North American business. Additionally, investors will closely monitor the beverage volumes in North America, which have seen declines but showed signs of recovery last quarter.

International markets remain a mixed bag for PepsiCo, with Latin America experiencing weak food and beverage volumes in Q2, while Europe showed some positive momentum with a 5% increase in food volumes. Analysts will be looking for consistent performance across these regions as PepsiCo has been investing heavily in its global footprint. The company’s ability to generate stronger international growth will be key to offsetting domestic challenges and achieving its full-year guidance.

Citi has taken a cautious stance on PepsiCo ahead of its Q3 report, placing the stock on a 30-day negative catalyst watch. Analysts at Citi forecast a potential miss on organic sales growth (OSG), predicting an increase of only 1.5% versus the consensus estimate of 3.5%. Citi also expects PepsiCo to lower its full-year 2024 guidance for OSG from around 4% to possibly as low as 2.5%. Despite this conservative outlook, Citi still rates PepsiCo as a buy on a 12-month basis, citing the stock’s current valuation.

The North American consumer environment continues to be challenging for PepsiCo, as the company contends with slowing demand in its snack and beverage categories. Competitors like Coca-Cola (KO) and Keurig Dr Pepper (KDP) have shown stronger performance in their respective beverage segments, highlighting possible market share losses for PepsiCo. With small-format channels such as convenience stores and foodservice underperforming compared to larger grocery stores and warehouse clubs, the pressure on PepsiCo's North American operations is expected to persist.

PepsiCo's Q2 earnings report highlighted ongoing challenges for the company, particularly in its North American operations, where volumes continued to decline. Frito-Lay North America experienced a notable 4% drop in volume, marking the worst quarter in years, while Beverages North America saw a 3% decline. Despite these volume decreases, PepsiCo managed to deliver a modest top-line growth of 0.8% year-over-year and an organic growth rate of 1.9%, achieving revenues of $22.5 billion. The company’s pricing strategy partly offset the volume declines, with price increases of 3% for snacks and 5% for beverages. However, the shift in consumer behavior toward away-from-home consumption and the competitive nature of the snack segment posed significant headwinds, making price hikes harder to digest for consumers.

Looking ahead, PepsiCo slightly downgraded its full-year 2024 organic revenue growth outlook to an approximate 4% increase, leaving room for the possibility of falling short of this target. Nonetheless, it reaffirmed its full-year EPS guidance of at least $8.15, reflecting cautious optimism despite the tough economic environment. The company is also optimistic about its supply chain recovery, aiming for full restoration by Q4. Internationally, PepsiCo posted gains in beverages across all regions and a rebound in Convenient Foods volume in Europe, partially offsetting declines in Latin America and Asia Pacific. While PepsiCo's Q2 performance was mixed, it highlights ongoing struggles with consumer trends and market pressures, particularly in comparison to competitors like Coca-Cola and Keurig Dr Pepper, who showed stronger beverage volume growth in previous quarters.

Overall, PepsiCo’s Q3 earnings report will be a crucial indicator of how well the company can navigate its current challenges, particularly in its core North American market. Investors will be looking for any positive signs of volume stabilization in snacks and beverages, along with updates on the company's pricing strategies and international growth. With shares down about 6% since early September and flat for the year, stronger-than-expected results could help the stock regain momentum and close the performance gap with its competitors.

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