PepsiCo (PEP) earnings did it again, topping Wall Street’s top- and bottom-line forecasts for a seventh straight quarter in a showing that solidifies Pepsi stock as a defensive stalwart during a poor year for equities.
PepsiCo stock has by no means been a hot stock so far this year, but it’s been a relative superstar compared to the broader market. For the year, PEP stock is up 3.1% compared to the S&P 500 drop of 3.9%. And PepsisCo’s top competitor isn’t faring much better: Coca-Cola (KO) stock is off 2.4% so far this year.
In what appears to be a secular shift, consumers are drinking fewer carbonated beverages, but Pepsi’s key competitive advantage is that it derives about half of its revenue from Frito-Lay. Although the decline in Big Soda hurts Pepsi as much as Coke, the snacks business goes a long way toward mitigating that pain.
With a more diversified product portfolio in its arsenal that is closely correlated to the health of U.S. consumers — Pepsi has been better able to weather the macroeconomic forces hurting all U.S. multinationals.
Sure, the strong dollar is hurting sales as Pepsi generates half of its revenue overseas, and currency effects stripped 12 percentage points off of the top line. Not to mention revenue declined 5.2% year-over-year, hit hard by the disaster that is Venezuela.
PepsiCo Earnings Maintain Momentum
Regardless, Pepsi was able to ride costs cuts and a 2% price hike to a better-than-expected quarter. As CEO Indra Nooyi summed it up in a statement:
“Despite ongoing volatility in many of our key international markets, we delivered strong organic revenue growth, gross margin expansion and double-digit core constant currency EPS growth.”
For the most recent period, Pepsi earnings came to $533 million, or 36 cents a share, down from $2.01 billion, or $1.32, a year earlier. Venezuela’s crumbling oil-based economy and the steep devaluation of the bolivar led Pepsi to take big charge.
However, all analysts care about are adjusted earnings. After excluding Venezuela and other items, earnings were $1.35 vs. a Street forecast of $1.26, according to a survey by Thomson Reuters.
That’s a big earnings beat.
Revenue came in at $16.33 billion vs. the $16.15 billion estimate.
Cost cutting and price hikes allowed Pepsi’s gross margin to rise to 54.7% from 53.6%. That may not sound like much, but margin expansion is sweet music to analysts’ ears. Indeed, gross margin has now increased for 13 straight quarters.
And just to put a cherry on top, PepsiCo lifted its outlook.
Bottom Line on PepsiCo Stock
As we noted earlier, shrinking sales and profits aren’t good, but they’ll have no bearing on PepsiCo stock these days as long as they don’t come up short of forecasts. Earnings reports are more about fulfilling or beating the Street’s expectations than anything else.
Throw in a decent dividend and a $12 billion stock repurchase program, and you can count on PepsiCo stock for more defense through year-end at least.
PepsiCo stock was up 1.5% as of afternoon trading.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
