Macroeconomic headwinds are hitting PepsiCo (PEP) as much as any U.S. multinational, but as PEP’s Tuesday quarterly earnings should show once again, the beverage and snack maker continues to chug ahead with better-than-expected results.
Hey, there’s a reason why Pepsi stock is slightly positive for the year to date when main competitor Coca-Cola (KO) is off 3.2% and the broader market is down 3.9%. It has shown remarkable resilience in the face of everything from macro problems to secular changes in consumer demand for sweet, carbonated drinks.
Indeed, sales of fizzy drinks have been a slowly melting iceberg for years now as more health-conscious consumers increasingly shun drinks made with sugar, high-fructose corn syrup and even artificial sweeteners.
PEP and the rest of the industry has responded by focusing on growth categories like bottled water, sports and energy drinks, fruit drinks and bottled teas, but the drop in soda demand remains a huge concern.
Fortunately for investors in PEP stock, the company isn’t a one-trick pony like KO. Rather than rely solely on beverages, Pepsico generates about half its revenue from the Frito-Lay snacks business.
Strangely, health-conscious consumers may be shying away from fizzy drinks, but they’ve maintained their taste for salty snacks.
PEP Survives on Fritos, Doritos and Quaker Oats
Thanks to the snacks business, an effective marketing push and cost cuts, PEP has managed pretty well in a tough global environment that’s causing sales to decline.
Roughly half of PEP’s revenue is generated in overseas markets, so the strong dollar is chewing away at results. The company’s exposure to weakening or recessionary emerging markets has also been an obstacle to overcome.
And yet, PepsiCo has topped analysts’ average revenue and earnings estimates for six consecutive quarters. That’s impressive considering that the same macro headwinds have been plaguing U.S. companies over the last several reporting periods.
There’s little reason to think PEP can’t beat the Wall Street estimates yet again. Just don’t expect any top- or bottom-line growth
Analysts expect PEP revenue to retreat 5.8% to $16.22 billion year-over-year, according to a survey by Thomson Reuters. Earnings are forecast to come in at $1.27 a share, down from $1.36 in the prior-year period.
Bottom Line
Shrinking sales and profits are never good, but they’ll have no bearing on Pepsi stock 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.
That has been adding buoyancy to PEP stock, as has the dividend (current yield of 2.98%) and some generous financial engineering. PEP is in the midst of a three-year, $12 billion stock buyback program.
As long as PEP keeps its better-than-expected results streak alive, it can be counted on for more defense this year.
No, PEP won’t make you rich, but it certainly offers ballast to any portfolio foundering in a poor year for equities.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
