Q2 Financial Results Review: Buy or Not Buy PepsiCo (PEP)?

PepsiCo, Inc. PEP is expected to report growth in revenue and income when it releases its second-quarter 2024 results on July 11, before the open of trading.

The Zacks Consensus Estimate for second-quarter revenues is $22.6 billion, up 1.2% from the prior-year quarter’s reported figure. For quarterly earnings, the consensus is $2.16, up 3.4% from the prior-year quarter’s reported figure of $2.09. The consensus estimate is unchanged over the past 30 days.

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In the last reported quarter, the company saw its profits grow by 5.9%. Over the last four quarters, the company has seen its results improve by an average of 5.1%.

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Whispers about earnings

Our proven model doesn’t predict PepsiCo’s earnings beat this time around. The combination of a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy), or 3 (Hold) increases the odds of an earnings beat. But that’s not the case here. You can discover the best stocks to buy or sell before they’re reported with our Earnings ESP Filter.

PepsiCo has a Zacks Rank #3 and an Earnings ESP of 0.00%. You can see complete list of today’s Zacks #1 Rank stocks here.

Trends leading to PEP’s Q2 results

PepsiCo is benefiting from the strength and resilience of its diverse portfolio, modernized supply chain, enhanced digital capabilities, flexible go-to-market distribution systems and strong consumer demand trends. The company is expected to benefit from the resilience and strength of its global beverage business.

Market share growth in the liquid refreshment category, with share gains in the carbonated beverage, ready-to-drink tea and water categories, likely contributed to the improvement in the beverage category. PEP’s food business is expected to benefit from gains in core brands such as Doritos, Lay’s, Ruffles, Tostitos and Cheetos, offset by softness in the Quaker Foods North America (“QFNA”) segment due to recent product recalls.

December 2023 and January 2024 product recalls in the QFNA segment hurt PEP’s revenue and earnings in the first quarter, primarily due to lower sales in the United States. The company is on track to resume increased production of some of the affected products through alternate facilities.

While PepsiCo expects the financial impact of the recall to diminish as the year progresses, we expect the recall implications to have some impact on second-quarter results. Our model numbers indicate a 22% decline in organic revenue for the QFNA segment.

However, PEP’s top line is expected to reflect gains from improved pricing across all segments. In addition, strength in the international business, leveraging strong category growth in developing and emerging markets, is expected to boost the top line in Q2.

Our model projects consolidated year-over-year organic revenue growth of 2.8% in Q2, driven by a 4.5% increase in price/mix, offset by a 1.7% decline in volume.

On an organic basis, we expect the company to achieve significant revenue growth in its international businesses in the second quarter. However, the North American business is expected to reflect weakness due to the ongoing impact of product recalls in QFNA and moderate revenue growth in Frito-Lay North America and PepsiCo Beverages North America.

Our model estimates organic revenue growth of 6% in Latin America and AMESA, 10% in Europe and 8% in APAC, reflecting continued momentum in the international businesses. On the other hand, we expect organic revenue to decline by 22% in QFNA and grow by 1% in PBNA, while FLNA is expected to report flat organic revenue in Q2.

The company’s financial results and margin in the reported quarter are expected to reflect continued benefits from comprehensive cost management initiatives that have contributed to improved supply chain and distribution efficiency, which were offset by ongoing inflationary pressures and planned business investments.

We expect adjusted gross margin to increase 20 basis points (bps) year over year to 54.9% in the second quarter. The increase in gross margin is expected to be driven by easing supply chain headwinds, partially offset by inflationary costs.

Price performance and pricing

PepsiCo shares have been on a downtrend, losing a significant percentage year-to-date. Specifically, the stock is down 3.2% compared to the broader sector and the consumer discretionary sector’s gains of 1.7% and 0.6%, respectively. Additionally, PepsiCo shares have significantly underperformed the S&P 500, which has risen 17.5% over the same period.

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PepsiCo’s stock performance contrasts sharply with that of its main rival Coca-Cola KO, whose shares are up 8.2% since the beginning of the year. The disparity highlights the significant decline in PepsiCo’s share price relative to its main rival. Meanwhile, shares of competitors, including Monster Drink MNST and Keurig Dr. Pepper During the same period, KDP recorded declines of 13.6% and 2%, respectively.

PepsiCo shares are currently trading at $164.39, which brings them close to their 52-week low of $155.83 and represents a discount of 14.5% from their 52-week high of $192.38.

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Despite the recent decline, PEP’s valuation based on its forward 12-month P/E suggests it could be an attractive pick for investors. The stock is trading at a forward P/E of 19.33X, below the industry average of 20.29X and the S&P 500 average of 21.91X.

While PepsiCo faces challenges, including underperformance relative to industry peers and broader market indices, its current undervaluation and strong brand portfolio could present a buying opportunity for long-term investors.

Investment thesis

PepsiCo has demonstrated consistent revenue growth and solid profitability, supported by a diverse product portfolio and global footprint. The company is focused on continuously improving productivity and efficiency by reducing costs and investing these savings to expand scale and core capabilities. In 2024, the company expects to increase its focus on overall cost management initiatives to increase productivity and leverage these savings to mitigate cost inflation and prioritize investments in its brands, innovation and channel expansion.

In addition, PepsiCo has invested heavily in its digital transformation and e-commerce capabilities. Efforts to enhance its direct-to-consumer platforms and digital marketing initiatives have paid off, as evidenced by its contribution to revenue growth. The company has a strong balance sheet with solid cash flow, which allows it to invest in growth opportunities, pay dividends and conduct share repurchases.

While PepsiCo’s strong financial performance and strategic initiatives provide a solid foundation for growth, evolving industry dynamics and external risks support a neutral stance on investment potential. Inflationary pressures, product recalls in QFNA and changing consumer behavior are among the factors impacting financial performance in recent quarters.

Application

As PepsiCo prepares to report its second-quarter 2024 earnings, trends such as strengths in the beverage segment, solid trends in its international business, digital growth, sustainability efforts, inflation challenges, innovative product launches and geopolitical factors are playing key roles in shaping PepsiCo’s results. Investors and analysts will be eager to see how these trends translate to financial results and what guidance the company provides for the rest of the year.

While PEP’s strong financial performance and strategic initiatives provide a solid foundation for growth, evolving industry dynamics and external risks support a neutral stance on investment potential. Investors should closely monitor the company’s ability to navigate these challenges and seize emerging opportunities to assess its long-term viability. As the company continues to navigate market dynamics and implement strategic initiatives, its ability to regain momentum and deliver value to shareholders will be key.

Stay on top of upcoming earnings announcements with the Zacks Earnings Calendar.

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.