Don’t Expect Pop From PepsiCo’s Earnings Report

by Jamie Dlugosch | October 11, 2011 8:00 am

Beverage and snack food giant PepsiCo (NYSE:PEP[1]) reports earnings for the quarter ending Sept. 30 before the market opens Wednesday. Investors can expect a solid if boring report from this stock.

Pepsico should be viewed as a defensive stock. Irrespective of economic conditions, earnings at the company should be expected to show slow and steady improvement. Weaker economic activity is not likely to be seen in beverage and snack consumption. As such, Pepsico’s strong cash flow should continue in the current period and beyond.

Last week, fast-food company Yum! Brands (NYSE:YUM[2]) beat earnings expectations. PepsiCo has an exclusive contract with Yum to serve Pepsi products throughout the company’s stores. Yum reaffirmed guidance and was optimistic about growth in China, albeit slower than previously, which should bode well for PepsiCo.

During the past four quarters, PepsiCo has basically met average Wall Street estimates:

PepsiCo PEP[3]

When the company reported results for the quarter ending June 30, management reduced future guidance. Pepsi noted that it was concerned about consumer demand. The company also announced that it would be increasing prices on certain products. The weaker forecast resulted in analysts cutting profit forecasts for the third quarter.

Today, the average Wall Street estimate is for PepsiCo to make $1.30 per share. Ninety days ago, the estimate was $1.36 per share. For the full year, the company is expected to make $4.42 per share — that number increases a tepid 7% to $4.72 in 2012. At current prices, PepsiCo trades for 14 times current-year earnings estimates.

PepsiCo PEP
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Shares slumped 13% after Pepsico reported results in the previous quarter.

Clearly, PepsiCo is going through a rough patch. The company is faring much worse than rival Coca-Cola (NYSE:KO[4]). Coke shares are down just 4% during the past three months.

Will a good report from important partner Yum be enough to reverse the trend for Pepsi? That remains to be seen. But lower commodity prices in the quarter might help performance. And the company is quite adept at managing Wall Street expectations. As such, look for the company to meet estimates for the third quarter. As a defensive play, don’t expect to see much change in future guidance — instead, the company should reaffirm what it announced in Q2.

While the company does pay a high dividend of 3.4%, PepsiCo’s valuation is high relative to expected growth. If nothing improves on the earnings front, shares might be vulnerable to further declines. It would take a very strong earnings report and increased guidance to justify current prices.

Don’t expect much from PepsiCo after this report. At best, the stock trades flat. I would avoid the stock or simply hold heading into the news.

As of this writing, Jamie Dlugosch did not own a position in any of the aforementioned stocks.

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  2. YUM:
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  4. KO:

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