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PepsiCo (PEP) Up 2.6% Since Last Earnings Report: Can It Continue?

A month has gone by since the last earnings report for PepsiCo (PEP). Shares have added about 2.6% in that time frame, underperforming the S&P 500.

Will the recent positive trend continue leading up to its next earnings release, or is PepsiCo due for a pullback? Before we dive into how investors and analysts have reacted as 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.

PepsiCo Q1 Earnings & Sales Beat, International Unit Aids

PepsiCo has reported robust first-quarter 2024 results, wherein revenues and earnings surpassed the Zacks Consensus Estimate and improved year over year. The company’s results have been mainly aided by improvements in its international business, which delivered significant volume growth and organic revenue growth of 9%.

PEP noted that each of its international businesses recorded at least high-single-digit organic revenue growth, along with organic volume growth across most units. Within the international business, organic revenues increased 9% for the convenient food business and 10% for the beverages category.

The results also reflect gains from strength and resilience in its categories, diversified portfolio, modernized supply chain, improved digital capabilities, flexible go-to-market distribution systems, and robust consumer demand trends.

PepsiCo’s first-quarter core EPS of $1.61 beat the Zacks Consensus Estimate of $1.52 and increased 7.3% year over year. In constant currency, core earnings improved 7% from the year-ago period, backed by the mitigation of inflationary pressures through cost-management and revenue-management initiatives. The company’s reported EPS of $1.48 rose 6% year over year in the quarter. The impact of currency rates on the quarter’s EPS was neutral.

Net revenues of $18,250 million rose 2.3% year over year and surpassed the Zacks Consensus Estimate of $18,155 million. Revenues gained from an improved price/mix in the reported quarter, offset by a unit volume decline of 0.5% for the convenient food business and a flat unit volume for the beverage business. Foreign currency impacted revenues by 0.5%.

On an organic basis, revenues grew 2.7% year over year, driven by growth across categories and geographies, except for QFNA. The consolidated organic volume was down 2%, while effective net pricing improved 5% in the first quarter. Pricing gains were driven by strong realized prices across all segments, except for QFNA and AMESA.

Our model predicted year-over-year organic revenue growth of 3.7% for the first quarter, with an 8.1% gain from price/mix and a 4.4% decline in volume.

On a consolidated basis, the reported gross profit increased 1.5% year over year to $10,002 million. The core gross profit rose 2.9% year over year to $10,162 million. The reported gross margin contracted 43 basis points (bps), whereas the core gross margin expanded 37 bps.

We anticipated the core gross margin to be flat at 55.3% in the first quarter. In dollar terms, core gross profit was expected to increase 1.9% year over year.

The company reported an operating income of $2,717 million rose 3.3% year over year. The core operating income grew 4.9% year over year to $2,939 million and the core constant-currency operating income improved 10%. The reported operating margin expanded 16 bps from the year-ago quarter. Meanwhile, the core operating margin expanded 40 bps due to ongoing holistic cost-management initiatives to drive superior supply chain and distribution efficiencies.

Our model predicted core SG&A expenses of $7.3 billion, which indicated year-over-year growth of 2.7%. As a percentage of sales, core SG&A expenses were anticipated at 39.9%, suggesting a 30-bps rise from the prior-year quarter. We expected a core operating margin of 15.4%, implying a 30-bps decline from the year-ago quarter’s actual.

Segmental Details

The company witnessed reported and organic revenue growth across all operating segments, except for QFNA. Revenues in the QFNA segment were impacted by certain product recalls and tough revenue growth comparison with the prior year.

Revenues, on a reported basis, improved 2% each year over year in the FLNA and AMESA segments. Also, reported revenues rose 16% in Latin America, 1% in PBNA, 3% in Europe and 6% in the APAC segment. Organic revenues increased 2% for FLNA, 1% for PBNA, 8% for Latin America, 10% for Europe, 7% for AMESA and 11% for the APAC segment. However, revenues declined 24% for the QFNA segment on both reported and organic basis.

Financials

The company ended first-quarter 2024 with cash and cash equivalents of $8,047 million, long-term debt of $37,707 million, and shareholders’ equity (excluding non-controlling interest) of $19,190 million. Net cash used in operating activities was $1,041 million as of Mar 23, 2024, compared with $392 million used as of Mar 25, 2023.

Outlook

PepsiCo has retained its view for 2024. The company expects organic revenue growth of at least 4% for 2024. It anticipates core constant-currency EPS growth of at least 8% from the year-ago period’s reported figure. PEP expects currency headwinds to hurt revenues and the core EPS by 1 percentage point in 2024, based on the current rates. The company expects a core effective tax rate of 20% for 2024.

Based on the above assumption, PepsiCo expects a core EPS of at least $8.15 for 2024. This suggests a 7% increase from the core EPS of $7.62 reported in 2023.

PepsiCo has been committed to rewarding shareholders through dividends and share buybacks. It expects to return a value worth $8.2 billion in 2024, including $7.2 billion of dividends. Additionally, the company plans to repurchase shares worth $1 billion in 2024.

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How Have Estimates Been Moving Since Then?

In the past month, investors have witnessed a downward trend in fresh estimates.

VGM Scores

Currently, PepsiCo has an average Growth Score of C, though it is lagging a lot on the Momentum Score front with an F. However, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of D. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

Estimates have been broadly trending downward for the stock, and the magnitude of these revisions indicates a downward shift. Notably, PepsiCo has a Zacks Rank #2 (Buy). We expect an above average return from the stock in the next few months.

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