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Evaluating PepsiCo Before Q3 Earnings: Buy the Stock Now or Hold Off?
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PepsiCo, Inc. (PEP - Free Report) is expected to register bottom and top-line growth when it reports third-quarter 2024 numbers on Oct. 8, before the opening bell.
Stay up-to-date with all quarterly releases: See Zacks Earnings Calendar.
The Zacks Consensus Estimate for third-quarter revenues is pegged at $23.9 billion, implying 2% growth from the year-ago quarter's reported figure. For quarterly earnings, the consensus mark is pegged at $2.30, suggesting 2.2% growth from the $2.25 reported in the prior-year quarter. The consensus mark has moved down by a penny in the past seven days.
Image Source: Zacks Investment Research
In the last reported quarter, the company registered an earnings beat of 6.1%. It has delivered an earnings surprise of 4.8%, on average, in the trailing four quarters.
Our proven model does not conclusively predict an earnings beat for PepsiCo this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of an earnings beat. But that is not the case here. You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.
PepsiCo has a Zacks Rank #3 and an Earnings ESP of -0.94%.
PepsiCo’s third-quarter 2024 performance is expected to have been affected by challenges in its North America operations since the start of 2024, including reduced consumer demand and product recalls in the Quaker Foods North America (“QFNA”) segment.
PEP’s top-line performance for the North America business continues to be impacted by subdued category demand within its North America convenient foods business. The company has struggled with reduced consumer demand in its key North America markets due to aggressive pricing actions, which led to reduced volumes as consumers adjust their spending habits amid economic pressures. This has resulted in soft revenue trends for the PepsiCo Beverages North America (PBNA) and the Frito-Lay North America (FLNA) divisions.
We expect continued soft sales trends for the FLNA and PBNA segments to continue in the to-be-reported quarter, anticipating sales growth of 1% and 3%, respectively, for the third quarter of 2024.
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.
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, we are wary about the QFNA segment's near-term recovery prospects. Our model predicts revenues for the QFNA segment to decline 14% year over year in third-quarter 2024.
However, PEP’s strong international business, aided by category growth in the developing and emerging markets, is expected to have cushioned the top line to some extent in the third quarter. On an organic basis, we expect the company to deliver notable revenue growth across its international units in the third quarter, with growth of 3% in Latin America, 10% each in Europe and AMESA, and 7% in APAC.
Our model predicts consolidated year-over-year organic revenue growth of 3.7% for the third quarter, driven by a 4.6% rise in the price/mix, offset by a 0.9% decline in volume.
The company’s bottom line and margin results in the to-be-reported quarter are expected to reflect the continued benefits of its ongoing holistic cost-management initiatives that have been driving superior supply chain and distribution efficiencies.
We anticipate the adjusted gross margin to increase 40 basis points (bps) year over year to 54.8% in the third quarter. Gross margin growth is expected to result from eased supply-chain headwinds, partly offset by inflationary costs.
Price Performance & Valuation
PepsiCo’s shares have exhibited restrained growth in the past three months. The stock has risen 4.2% compared with the broader industry and the Consumer Staples sector’s increases of 8.4% and 8.9%, respectively. However, PepsiCo's stock has outpaced the S&P 500 index, which grew 2.6% in the same period.
PEP Stock’s 3-Month Performance
Image Source: Zacks Investment Research
PEP’s current stock price of $169.55 reflects an 8.8% premium with its 52-week low mark of $155.83 and a 7.6% discount from its 52-week high of $183.41.
PepsiCo's stock performance lags behind its peers, including Coca-Cola (KO - Free Report) and Keurig Dr Pepper (KDP - Free Report) , which have risen 12.1% and 13.1%, respectively, in the past three months. This disparity highlights a significant dip in PepsiCo's stock price relative to its key rivals. Shares of Monster Beverage (MNST - Free Report) have grown 3.6% in the same period, slightly below PEP’s growth.
PEP’s stock valuation on a forward 12-month P/E basis reflects a significant discount with the broader industry. While this may seem like an opportunity for some investors, the valuation gap with its peers might not be as advantageous as it appears. The lower price could signal underlying issues rather than presenting an upfront investment opportunity.
The stock is trading at a forward P/E ratio of 19.72X, below the industry average of 21.45X and the S&P 500’s average of 21.58X.
Image Source: Zacks Investment Research
Investment Thesis
PepsiCo has demonstrated consistent revenue growth and solid profitability, supported by its diverse product range and global reach. The company benefits from investments in brands, go-to-market systems, supply chains, manufacturing capacity and digital capabilities. Strength and resilience in its categories, a diversified portfolio, a modernized supply chain, enhanced digital capabilities, and flexible go-to-market distribution systems position it for long-term growth.
PepsiCo invests heavily in its digital transformation and e-commerce capabilities, which have aided top-line growth. The company is also positioned to benefit from its international presence as it generates a significant share of its revenues outside the United States. The company is focused on continually driving greater efficiency and effectiveness by reducing costs and plowing back these savings to develop scale and core capabilities.
While PepsiCo’s strong financial performance and strategic initiatives provide a solid foundation for growth, the evolving industry dynamics and external risks justify a neutral stance on its investment potential. Inflationary pressures, challenges in its North America operations, including product recalls at QFNA, and changing consumer behavior are factors affecting its financial performance in recent quarters.
Conclusion
As PepsiCo prepares to announce its third-quarter 2024 earnings, investors may question whether this is the right time to buy the stock. Trends such as robust international business, digital growth, sustainability efforts and innovative product launches can have a positive effect on its quarterly performance. However, we cannot ignore the company’s recent challenges in its North America operations and the broader market environment. Recent market data suggests bleak prospects for near-term recovery in its North America business.
Investors should closely monitor the company's ability to navigate these challenges and capitalize on emerging opportunities to assess its long-term viability. Its ability to regain momentum and deliver value to shareholders will be crucial. Investors and analysts will be keen to see how these trends translate into financial results and what guidance the company provides for the remainder of the year.
While PepsiCo’s long-term prospects remain strong, investors should avoid making hasty decisions. Monitoring developments and waiting for clearer signs of recovery before investing is a prudent strategy, as acting too quickly could affect portfolio performance. If you already hold PEP stock, maintaining your position could be wise, as the upcoming earnings report is expected to offer greater clarity on the company’s outlook.
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Evaluating PepsiCo Before Q3 Earnings: Buy the Stock Now or Hold Off?
PepsiCo, Inc. (PEP - Free Report) is expected to register bottom and top-line growth when it reports third-quarter 2024 numbers on Oct. 8, before the opening bell.
Stay up-to-date with all quarterly releases: See Zacks Earnings Calendar.
The Zacks Consensus Estimate for third-quarter revenues is pegged at $23.9 billion, implying 2% growth from the year-ago quarter's reported figure. For quarterly earnings, the consensus mark is pegged at $2.30, suggesting 2.2% growth from the $2.25 reported in the prior-year quarter. The consensus mark has moved down by a penny in the past seven days.
Image Source: Zacks Investment Research
In the last reported quarter, the company registered an earnings beat of 6.1%. It has delivered an earnings surprise of 4.8%, on average, in the trailing four quarters.
PepsiCo, Inc. Price and EPS Surprise
PepsiCo, Inc. price-eps-surprise | PepsiCo, Inc. Quote
PEP's Earnings Whispers
Our proven model does not conclusively predict an earnings beat for PepsiCo this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) increases the chances of an earnings beat. But that is not the case here. You can uncover the best stocks to buy or sell before they are reported with our Earnings ESP Filter.
PepsiCo has a Zacks Rank #3 and an Earnings ESP of -0.94%.
You can see the complete list of today’s Zacks #1 Rank stocks here.
What to Look for in PEP’s Q3 Earnings Release
PepsiCo’s third-quarter 2024 performance is expected to have been affected by challenges in its North America operations since the start of 2024, including reduced consumer demand and product recalls in the Quaker Foods North America (“QFNA”) segment.
PEP’s top-line performance for the North America business continues to be impacted by subdued category demand within its North America convenient foods business. The company has struggled with reduced consumer demand in its key North America markets due to aggressive pricing actions, which led to reduced volumes as consumers adjust their spending habits amid economic pressures. This has resulted in soft revenue trends for the PepsiCo Beverages North America (PBNA) and the Frito-Lay North America (FLNA) divisions.
We expect continued soft sales trends for the FLNA and PBNA segments to continue in the to-be-reported quarter, anticipating sales growth of 1% and 3%, respectively, for the third quarter of 2024.
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.
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, we are wary about the QFNA segment's near-term recovery prospects. Our model predicts revenues for the QFNA segment to decline 14% year over year in third-quarter 2024.
However, PEP’s strong international business, aided by category growth in the developing and emerging markets, is expected to have cushioned the top line to some extent in the third quarter. On an organic basis, we expect the company to deliver notable revenue growth across its international units in the third quarter, with growth of 3% in Latin America, 10% each in Europe and AMESA, and 7% in APAC.
Our model predicts consolidated year-over-year organic revenue growth of 3.7% for the third quarter, driven by a 4.6% rise in the price/mix, offset by a 0.9% decline in volume.
The company’s bottom line and margin results in the to-be-reported quarter are expected to reflect the continued benefits of its ongoing holistic cost-management initiatives that have been driving superior supply chain and distribution efficiencies.
We anticipate the adjusted gross margin to increase 40 basis points (bps) year over year to 54.8% in the third quarter. Gross margin growth is expected to result from eased supply-chain headwinds, partly offset by inflationary costs.
Price Performance & Valuation
PepsiCo’s shares have exhibited restrained growth in the past three months. The stock has risen 4.2% compared with the broader industry and the Consumer Staples sector’s increases of 8.4% and 8.9%, respectively. However, PepsiCo's stock has outpaced the S&P 500 index, which grew 2.6% in the same period.
PEP Stock’s 3-Month Performance
Image Source: Zacks Investment Research
PEP’s current stock price of $169.55 reflects an 8.8% premium with its 52-week low mark of $155.83 and a 7.6% discount from its 52-week high of $183.41.
PepsiCo's stock performance lags behind its peers, including Coca-Cola (KO - Free Report) and Keurig Dr Pepper (KDP - Free Report) , which have risen 12.1% and 13.1%, respectively, in the past three months. This disparity highlights a significant dip in PepsiCo's stock price relative to its key rivals. Shares of Monster Beverage (MNST - Free Report) have grown 3.6% in the same period, slightly below PEP’s growth.
PEP’s stock valuation on a forward 12-month P/E basis reflects a significant discount with the broader industry. While this may seem like an opportunity for some investors, the valuation gap with its peers might not be as advantageous as it appears. The lower price could signal underlying issues rather than presenting an upfront investment opportunity.
The stock is trading at a forward P/E ratio of 19.72X, below the industry average of 21.45X and the S&P 500’s average of 21.58X.
Image Source: Zacks Investment Research
Investment Thesis
PepsiCo has demonstrated consistent revenue growth and solid profitability, supported by its diverse product range and global reach. The company benefits from investments in brands, go-to-market systems, supply chains, manufacturing capacity and digital capabilities. Strength and resilience in its categories, a diversified portfolio, a modernized supply chain, enhanced digital capabilities, and flexible go-to-market distribution systems position it for long-term growth.
PepsiCo invests heavily in its digital transformation and e-commerce capabilities, which have aided top-line growth. The company is also positioned to benefit from its international presence as it generates a significant share of its revenues outside the United States. The company is focused on continually driving greater efficiency and effectiveness by reducing costs and plowing back these savings to develop scale and core capabilities.
While PepsiCo’s strong financial performance and strategic initiatives provide a solid foundation for growth, the evolving industry dynamics and external risks justify a neutral stance on its investment potential. Inflationary pressures, challenges in its North America operations, including product recalls at QFNA, and changing consumer behavior are factors affecting its financial performance in recent quarters.
Conclusion
As PepsiCo prepares to announce its third-quarter 2024 earnings, investors may question whether this is the right time to buy the stock. Trends such as robust international business, digital growth, sustainability efforts and innovative product launches can have a positive effect on its quarterly performance. However, we cannot ignore the company’s recent challenges in its North America operations and the broader market environment. Recent market data suggests bleak prospects for near-term recovery in its North America business.
Investors should closely monitor the company's ability to navigate these challenges and capitalize on emerging opportunities to assess its long-term viability. Its ability to regain momentum and deliver value to shareholders will be crucial. Investors and analysts will be keen to see how these trends translate into financial results and what guidance the company provides for the remainder of the year.
While PepsiCo’s long-term prospects remain strong, investors should avoid making hasty decisions. Monitoring developments and waiting for clearer signs of recovery before investing is a prudent strategy, as acting too quickly could affect portfolio performance. If you already hold PEP stock, maintaining your position could be wise, as the upcoming earnings report is expected to offer greater clarity on the company’s outlook.