Snack and beverage giant Pepsi (PEP) will report second quarter fiscal 2020 earnings results before the opening bell Monday. The company has taken a hit during the pandemic, in part due to the lockdown restrictions and the effect it has had on the restaurant industry - many to which Pepsi is a beverage supplier.
In that same vein, however, with more people working and learning from home, Pepsi’s Frito-Lay brands snack business is likely to see a surge is sales. The question is, will the sales be enough to offset the impact in other areas? With Pepsi shares down some 3% year to date, it has outperformed not only the 5% decline of the Consumer Staples Select Sector SDPR ETF (XLP), it has crushed rival Coca-Cola (KO) which has plunged 20% on the year, namely due to its larger restaurant exposure.
As such, now could be an ideal time to establish a position in Pepsi. Aside from the fact that it continues to find ways to meet consumer demand for healthy beverage and snack options, the company also pays a strong 3.00% dividend yield — a full point higher than the S&P 500 index. Still, on Monday Pepsi will need to make its case to the market by delivering not only a top- and bottom-line beat, it also needs to deliver upbeat outlook to suggest that its growth trends can continue in 2020 and beyond.
For the three months that ended June, Wall Street expects the company to earn $1.25 per share on revenue of $15.34 billion. This compares to the year-ago quarter when earnings came to $1.54 per share on $16.45 billion in revenue. For the full year, ending in October, earnings of $5.34 per share would decline 3.4% year over year, while full-year revenue of $67 billion would decline about 0.2% year over year.
While the expected year-over-year declines in revenue might be discouraging, it really needs to be put in the context of the impact the pandemic has had on the company’s operations. During the Q1 conference call with analysts, management discussed potential pandemic-related uncertainties not only across its various end markets, but also with its retail channels and shifting consumer behaviors. The company has also spoken of higher labor it has incurred to meet customer demand. These include costs related to service and logistics.
As such, on Monday the market would be pleased with any increase in consolidated revenue and organic revenue growth, which is defined as revenue growth not driven by acquisitions. What’s more, while the outlook for Q2 seems downbeat, the quarterly expectations compare favorably to and implies growth above Q1’s actual results of EPS of $1.07 and revenue of $13.88 billion. And the company’s strong track record of execution shouldn’t be overlooked, namely Pepsi has either matched or beaten Street estimates every quarter for the past five years.
Nevertheless, its execution on Monday will be what matters the most. In addition to showing sustainable growth in snacks, Pepsi will need to show improved beverage sales and issue positive guidance. These points aside, with the stock at $133 per share, which is $10 below its consensus price target, Pepsi offers tremendous value for investors who are willing to hold it for the next 12 to 18 months.
The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
Richard Saintvilus
After having spent 20 years in the IT industry serving in various roles from system administration to network engineer, Richard Saintvilus became a finance writer, covering the investor's view on the premise that everyone deserves a level playing field. His background as an engineer with strong analytical skills helps him provide actionable insights to investors. Saintvilus is a Warren Buffett disciple who bases his investment decisions on the quality of a company's management, its growth prospects, return on equity and other metrics, including price-to-earnings ratios. He employs conservative strategies to increase capital, while keeping a watchful eye on macro-economic events to mitigate downside risk. Saintvilus' work has been featured on CNBC, Yahoo! Finance, MSN Money, Forbes, Motley Fool and numerous other outlets. You can follow him on Twitter at @Richard_STv.
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