Pepsi (PEP) will report third quarter fiscal 2020 earnings results before the opening bell Thursday. The snack and beverage giant has taken a hit during the pandemic, in part due to the lockdown restrictions and the effect restaurant closures has had on the company’s soda and overall beverage sales.
In that same vein, however, with more people working and learning from home, Pepsi’s Frito-Lay brands snack business has taken off as shoppers stocked both their pantries and refrigerators with several Pepsi prepared-food brands such as Quaker Foods and Rice-A-Roni. While the company reported an 2% decline in Q2 organic revenue, this was nonetheless better than expected as overall demand took a hit at the height of the pandemic — an issue that also impacted rivals Coca-Cola (KO) and Keurig Dr. Pepper Snapple (KDP).
Nonetheless, Pepsi’s diversified food and beverage portfolio was a notable asset to the company, unlike its aforementioned rivals as Q2 total core gross margin rate grew 6 basis points to 55.6%. It’s for this reason, among other achievements, that Pepsis stock has outperformed the Consumer Staples Select Sector SDPR ETF (XLP) over the past six months. For the share price to remain bubbly, on Thursday the company will need to plant more optimism about the sustainability of its growth drivers, including its Frito-Lay North America business.
For the three months that ended September, Wall Street expects the company to earn of $1.48 per share on revenue of $17.21 billion. This compares to the year-ago quarter when earnings came to $1.56 per share on $17.19 billion in revenue. For the full year, ending in October, earnings of $5.36 per share would decline 3% year over year, while full-year revenue of $68 billion would rise about 1.2% year over year.
While the expected year-over-year declines in Q3 EPS might be discouraging, it really needs to be put in the context of the impact the pandemic has had on the company’s operations, namely its global retail channels. But few multinational companies has executed as well as Pepsi had during this period. As noted, the Q3 6-basis point rise in core gross margin rate was driven by 7% revenue increase in Frito-Lay North America segment. Equally impressive was the 23% surge Quaker Foods North America which offset the 7% decline North America Beverages.
Whether looking at Europe, Middle East and South Asia, Africa, etc, it was the same theme across the globe and in each category — the food business carried the beverage segment which saw lower demand from restaurants and convenience stores. The market is expecting similar results this quarter. The question will be with the company’s guidance for the next few quarters. The company has previously forecasted for organic revenue to grow 4% this year, along with 7% in EPS growth.
What’s more, there’s still $2 billion remaining on its stock buyback program for this year, which is notable particularly at a time when many companies have suspended share buybacks due to poor earnings and/or a weak economic outlooks. As such, now could be an ideal time to establish a position in Pepsi which also pays a strong 3.00% dividend yield — a full point higher than the S&P 500 index.
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