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PepsiCo (PEP) Stirs Mix Reactions Post Q2 Earnings: Hold or Fold?
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The PepsiCo Inc. (PEP - Free Report) stock has seen a sparse movement on the bourses since the release of its second-quarter 2024 results on Jul 11, 2024. Shares of the beverage and snacking big wig showed a meager rise of 5.3% since the last earnings release. This modest growth reflects the mixed sentiments among investors. Let us explore whether this is related to the company’s Q2 performance, outlook, or some other specific factors.
PepsiCo’s second-quarter results were a mixed bag, as the company exceeded the Zacks Consensus Estimate for earnings per share (EPS) but fell short on revenue. PEP posted muted revenue growth of just 0.8% in the second quarter, much below 10.4% revenue growth recorded in the year-ago quarter. Additionally, revenues reflected a sharp slowdown from a 2.3% rise registered in the first quarter.
While the company has done a remarkable job in protecting its bottom line, backed by holistic cost-management initiatives, the significant slowdown in revenue growth requires further introspection.
Image Source: Zacks Investment Research
North America Business Sets Off Alarms
PepsiCo's North America operations have encountered several obstacles in 2024, affecting its overall sales performance. The challenges faced by the Quaker Foods North America (QFNA) segment, particularly issues with product recalls, have been a significant factor.
The QFNA segment, which features brands such as Quaker Oats, has been adversely impacted by product recalls linked to contamination concerns like Salmonella, affecting various cereal and snack items. These recalls have weakened the segment's performance, resulting in diminished sales and profits in recent quarters.
In the second quarter, the QFNA segment notably impacted the company's overall organic sales, contributing a 60-basis-point decline. Organic sales for this segment dropped 18% year over year, driven by the effects of the recalls and weaker category demand. Additionally, core operating profit fell 23% year over year, primarily due to the product recall-related impacts and certain inflationary pressures.
The product recalls not only disrupted sales but also attracted extra costs related to the recall process, including logistics, communication and potential brand damage. Consequently, analysts are wary about the QFNA segment's near-term recovery prospects.
Beyond product recalls, the company has struggled with reduced consumer demand in its key North America markets. This decline is partially attributed to increased pricing, which has led to reduced volumes as consumers adjust their spending habits amid economic pressures. For instance, the Frito-Lay North America (FLNA) division experienced a 4% year-over-year volume decline in the second quarter, whereas the PepsiCo Beverages North America (PBNA) division saw a 3% drop in volume.
Notably, organic sales for the FLNA segment were flat year over year in the second quarter compared with a 14% increase recorded in second-quarter 2023. The PBNA segment reported a 1% rise in organic sales in the recent quarter, a sharp contrast to 10% growth recorded in the prior-year quarter.
Estimates Suggest Shifting Dynamics
The Zacks Consensus Estimate for PepsiCo's third-quarter 2024 EPS declined 3.8% in the last 30 days, highlighting the growing concerns about the challenges the company is expected to encounter in the North American market in the near term.
The Zacks Consensus Estimate for PepsiCo's 2024 EPS dropped by a penny over the last 30 days. The same for 2025 EPS also decreased by a penny in the past seven days. These downward revisions in earnings estimates reflect growing concerns among analysts about the stock.
Image Source: Zacks Investment Research
Undervalued Stock
Although the PEP stock is currently trading at a discount compared with its industry peers, this valuation disparity might not be as favorable as it seems. The lower price could be indicative of underlying issues rather than representing a clear investment opportunity.
PepsiCo is currently trading at a forward 12-month P/E ratio of 20.29X, below the industry average of 21.05X and the S&P 500’s average of 21.17X.
The stock also trades at a discount to its peers, including The Coca-Cola Company (KO - Free Report) , Monster Beverage (MNST - Free Report) and Vita Coco Company (COCO - Free Report) , which are trading at forward 12-month P/E multiples of 22.62X, 27.08X and 23.93X, respectively.
Image Source: Zacks Investment Research
Conclusion
PepsiCo's second-quarter 2024 results present a complex picture of its current standing, notably impacted by product recalls in its North America operations. The struggles in the QFNA segment, combined with a slowdown in consumer trends, warrant a cautious approach for existing investors. Potential investors should consider waiting for clearer signs of recovery before investing in this Zacks Rank #4 (Sell) stock.
Image: Bigstock
PepsiCo (PEP) Stirs Mix Reactions Post Q2 Earnings: Hold or Fold?
The PepsiCo Inc. (PEP - Free Report) stock has seen a sparse movement on the bourses since the release of its second-quarter 2024 results on Jul 11, 2024. Shares of the beverage and snacking big wig showed a meager rise of 5.3% since the last earnings release. This modest growth reflects the mixed sentiments among investors. Let us explore whether this is related to the company’s Q2 performance, outlook, or some other specific factors.
PepsiCo’s second-quarter results were a mixed bag, as the company exceeded the Zacks Consensus Estimate for earnings per share (EPS) but fell short on revenue. PEP posted muted revenue growth of just 0.8% in the second quarter, much below 10.4% revenue growth recorded in the year-ago quarter. Additionally, revenues reflected a sharp slowdown from a 2.3% rise registered in the first quarter.
While the company has done a remarkable job in protecting its bottom line, backed by holistic cost-management initiatives, the significant slowdown in revenue growth requires further introspection.
Image Source: Zacks Investment Research
North America Business Sets Off Alarms
PepsiCo's North America operations have encountered several obstacles in 2024, affecting its overall sales performance. The challenges faced by the Quaker Foods North America (QFNA) segment, particularly issues with product recalls, have been a significant factor.
The QFNA segment, which features brands such as Quaker Oats, has been adversely impacted by product recalls linked to contamination concerns like Salmonella, affecting various cereal and snack items. These recalls have weakened the segment's performance, resulting in diminished sales and profits in recent quarters.
In the second quarter, the QFNA segment notably impacted the company's overall organic sales, contributing a 60-basis-point decline. Organic sales for this segment dropped 18% year over year, driven by the effects of the recalls and weaker category demand. Additionally, core operating profit fell 23% year over year, primarily due to the product recall-related impacts and certain inflationary pressures.
The product recalls not only disrupted sales but also attracted extra costs related to the recall process, including logistics, communication and potential brand damage. Consequently, analysts are wary about the QFNA segment's near-term recovery prospects.
Beyond product recalls, the company has struggled with reduced consumer demand in its key North America markets. This decline is partially attributed to increased pricing, which has led to reduced volumes as consumers adjust their spending habits amid economic pressures. For instance, the Frito-Lay North America (FLNA) division experienced a 4% year-over-year volume decline in the second quarter, whereas the PepsiCo Beverages North America (PBNA) division saw a 3% drop in volume.
Notably, organic sales for the FLNA segment were flat year over year in the second quarter compared with a 14% increase recorded in second-quarter 2023. The PBNA segment reported a 1% rise in organic sales in the recent quarter, a sharp contrast to 10% growth recorded in the prior-year quarter.
Estimates Suggest Shifting Dynamics
The Zacks Consensus Estimate for PepsiCo's third-quarter 2024 EPS declined 3.8% in the last 30 days, highlighting the growing concerns about the challenges the company is expected to encounter in the North American market in the near term.
The Zacks Consensus Estimate for PepsiCo's 2024 EPS dropped by a penny over the last 30 days. The same for 2025 EPS also decreased by a penny in the past seven days. These downward revisions in earnings estimates reflect growing concerns among analysts about the stock.
Image Source: Zacks Investment Research
Undervalued Stock
Although the PEP stock is currently trading at a discount compared with its industry peers, this valuation disparity might not be as favorable as it seems. The lower price could be indicative of underlying issues rather than representing a clear investment opportunity.
PepsiCo is currently trading at a forward 12-month P/E ratio of 20.29X, below the industry average of 21.05X and the S&P 500’s average of 21.17X.
The stock also trades at a discount to its peers, including The Coca-Cola Company (KO - Free Report) , Monster Beverage (MNST - Free Report) and Vita Coco Company (COCO - Free Report) , which are trading at forward 12-month P/E multiples of 22.62X, 27.08X and 23.93X, respectively.
Image Source: Zacks Investment Research
Conclusion
PepsiCo's second-quarter 2024 results present a complex picture of its current standing, notably impacted by product recalls in its North America operations. The struggles in the QFNA segment, combined with a slowdown in consumer trends, warrant a cautious approach for existing investors. Potential investors should consider waiting for clearer signs of recovery before investing in this Zacks Rank #4 (Sell) stock.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.