PepsiCo, Inc. (NYSE:PEP) easily topped Wall Street’s quarterly estimates and raised its outlook, sending Pepsi stock up smartly in what has already been a good year.
Revenue continues to fall on overseas weakness and unfavorable foreign exchange, yet PEP keeps managing to surprise to the upside. A resilient North American market boosted by the Frito-Lay snacks business has been an important key, but it was lower costs for raw materials that really put Pepsi stock over the top.
The latest better-than-expected results should help PEP stock continue what has been a strong period of wide outperformance. For the year-to-date, Pepsi stock is up 9%. That beats the broader market by 3 percentage points, a result that could attract some performance-chasers as we get closer to year-end.
PEP, whose portfolio of brands includes Pepsi soda, Gatorade, Doritos and Quaker Oats, said third-quarter earnings came to $1.99 billion, or $1.37 a share, up from $533 million, or 36 cents a share, a year earlier.
On an adjusted basis, which is what analysts care about, Pepsico earnings came to $1.40 a share. The Street was actually expecting profit to decline to $1.32 a share, according a survey by Thomson Reuters.
Pepsico (PEP) Slows Its Sales Declines
Revenue continued to decline as expected, but by less than forecast. Pepsico’s top line retreated 2% to $16.03 billion vs. a forecast of $15.83 billion. Although it was the seventh straight quarter of lower sales year-over-year, it was the smallest drop in a year-and-a-half. Don’t underestimate what the decelerating top-line retreat can mean for sentiment.
The key for PEP stock was continued strength in North America. Sales and volume gains helped offset weakness in overseas markets, which are struggling with unfavorable foreign exchange. In North America, sales gained 3% to $5.52 billion.
The better-than-expected results allowed Pepsico to lift its full-year forecast. The company now sees adjusted earnings at $4.78 a share, up from a prior projection of $4.71 a share. The Street’s projection was for $4.76 a share.
Bottom Line for Pepsi Stock
PEP has price momentum and is clearly a market favorite this year, which bodes well for more intermediate upside at least. Pepsi stock is up nearly 8% in just the last six months, and the technicals are turning favorable as well. The latest action let PEP break resistance at its 50-day moving average, which should now offer something of a price floor.
The downside on Pepsi stock is the valuation, which is not exactly cheap at 21 times forward earnings. That said, a high price-to-earnings multiple can be interpreted as a sign of positive sentiment. Besides, a stock can trade at a lofty valuation for a long time before it reverts to the mean.
PEP stock has been a quiet market-beater in 2016 and there’s no reason to expect a let up anytime soon.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.
