PepsiCo Inc. (PEP), a long-time favorite among buy-and-hold investors, will step into the earnings confessional after the close on Tuesday next week. Despite its reputation as a buy-and-hold stock, PEP is still volatile enough surrounding earnings reports to make a good trade.
Taking a look at expectations, Wall Street is forecasting a 7% year-over-year decline in PepsiCo’s third-quarter earnings, with per share results expected to fall to $1.27. Revenue, meanwhile, is forecast to fall 5.6% to $16.25 billion. That said, PepsiCo has a long tradition of beating the Street’s view, topping the consensus estimate in every quarter for the past four years.
As a result, some analysts have set their targets a bit higher than the Street’s average. According to EarningsWhisper.com, the whisper number for PepsiCo’s third-quarter report comes in at $1.31 per share, 4 cents better than the consensus.
Optimism is prevalent for PEP stock throughout the brokerage community. For instance, Thomson/First Call reports that 17 of the 27 analysts following PEP rate it a “buy” or better. However, there is room for improvement in PepsiCo’s sentiment backdrop. Currently, the 12-month consensus price target of $108 represents a minor premium of only 14.6% to yesterday’s close, leaving the door open for potential price-target increases.
While not as optimistic as their brokerage bunch brethren, options traders have begun to come around on PEP stock. Currently resting at 0.72, PEP’s October put/call open interest ratio has steadily declined during the past several weeks. The weekly Oct 9 series put/call open interest ratio also comes in at 0.72, and has trended lower since the middle of last week.
Click to EnlargeOverall, weekly Oct 9 series implieds are projecting a modest post-earnings move of about 3.5% for PEP stock. The upper bound for this potential move lies at $97.80, while the lower bound lies at $91.20. Technically, PEP has struggled with resistance in the $95-$100 region, with its 10-, 20- and 50-day moving averages all converging in the $95 area.
A breakout above this hurdle could spark a larger-than-expected upside move as technical buyers move in. On the downside, PEP has growing technical support at $90, though a breach of this area could send the stock down for a test of its 200-day trendline in the $82 region.
2 Trades for PEP Stock
Call Spread: PEP stock has all but flatlined in 2015, as traders fret over economic woes and growth potential. However, PepsiCo can alleviate these fears with another solid report next week. Barring any major glitches or surprises, shares should be able to move higher follow earnings, creating the potential for additional gains once $95 is taken out.
Those looking for a bullish options trade on PEP stock ahead of earnings might want to consider an Oct $95/$97 bull call spread. At last check, this spread was offered at 76 cents, or $76 per pair of contracts. Breakeven rests at $95.76, while a maximum profit of $1.24, or $124 per pair of contracts, is possible if PEP stock closes at or above $97 when October options expire.
Put Sell: Alternately, if you’re not sold on PEP stock’s upside potential, a weekly Oct $90 put sell has a high probability of finishing out of the money. At last check, this option was bid at 49 cents, or $49 per contract. As usual with a put sell, you keep the premium as long as PEP stock closes above $90 when weekly October options expire at the end of next week. On the downside, if PEP trades below $90 prior to expiration, you could be assigned 100 shares for each put sold at a cost of $90 per share.
As of this writing, Joseph Hargett did not hold a position in any of the aforementioned securities.
