PepsiCo Earnings Preview: Should Investors Be Thirsty for PEP Stock? – October 7, 2022

Investors will get a taste of how PepsiCo (DYNAMISM Free Report) navigates an increasingly challenging operating environment when it releases its FY22 third quarter financial results on Wednesday, October 12.

While many companies struggle during times of high inflation, investors are hoping that PepsiCo can excel or at least shrug off the current economic downturn. PEP shares have fared considerably better than the broader market this year and could very well help investors fight inflation.

PepsiCo and its rival Coca-Cola (KO Free Report) have always been defensive hedges amid economic uncertainty given their status as consumer staples giants.

Let’s take a look at what to expect from PEP’s third quarter earnings release to see how PepsiCo is faring during the economic uncertainty.

Insight

Trading around 10% off its highs, it will be important to see whether consumer thirst for PepsiCo’s products has continued into the third quarter. PepsiCo has also diversified its business to include complementary brands such as Frito Lay Snacks, Gatorade sports drinks, Tropicana juices and Quaker foods.

Last quarter, PEP beat earnings expectations by 7% and sales held steady despite consumers facing rising spending such as gasoline. CEO Ramon Laguarta mentioned that while PepsiCo is worried about rising inflation, PEP hasn’t seen a change in consumer buying behavior.

Performance

PEP is down only -6% year-to-date, outperforming the -22% of the S&P 500, as investors seek stability amid market uncertainty. Although the +315% rise in the S&P 500 has beaten PEP’s performance over the past 20 years, we can see from the adjacent chart that PEP stock has held up much better than the broader market during the financial crisis. .

Image source: Zacks Investment Research

If we take the last five years of the 20-year chart and focus on total return, including dividends, we will see that PEP has outperformed the benchmark. PEP’s impressive +70% total return topped the S&P 500’s +64%. It also crushed rival Coca-Cola’s +20% total return. PEP’s total return over the past year is +4%, which also exceeded the benchmark’s -16%, and KO’s return is virtually flat.

Zacks Investment Research
Image source: Zacks Investment Research

Outlook

Zacks’ consensus estimate for PEP’s third-quarter earnings is $1.84 per share, which would represent a 3% increase from the third quarter of 2021. Third-quarter sales are also expected to rise 3% at $20.85 billion. Estimates for the period have mostly remained the same over the past two months.

Year-over-year, PEP is expected to post 6% earnings growth in 2022, and its FY23 earnings are expected to grow another 8%. Strong revenue growth is also expected, with FY22 sales expected to grow 5% and another 3% in FY23 to $86.74 billion.

PepsiCo is also expected to see earnings growth of 7.6% over the next five years, which is higher than Coca-Cola’s 6.4%.

Evaluation

Trading around $162 per share, PEP has a forward P/E of 24.4X. That’s below its peak of 27.8X over the past decade and not too far off the median of 21.6X.

PEP’s P/E is slightly above the industry average of 22.3X, which is also on par with its KO rival. However, investors have always been willing to pay a premium for PEP relative to its industry.

PEP’s cash flow per share of 8.1 is above the industry average of 0.5 and KO at 2.6. PepsiCo’s higher cash flow could certainly be important in the current economic downturn as operating costs could rise.

Conclusion

PepsiCo’s third quarter results are highly anticipated and will help investors get a clearer view of how consumer spending behavior has affected the company. It will also give insight into PEP stock as a potential inflation hedge or if current economic conditions have started to weigh on the business.

PEP currently has a Zacks rank of #3 (Hold) and its soft drink industry is in the bottom 32% of over 250 Zacks industries. However, PEP’s 2.83% annual dividend yield at $4.60 per share is also helping investors generate strong income.

While PepsiCo’s dividend yield lags Coca-Cola’s 3.20% yield, the combination of a strong dividend and its growth has helped the stock outperform its rival and the benchmark over the past few months. last five years.

Robert D. Coleman