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Why Can PepsiCo Predict Second Quarter Earnings Season?

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More guidance than results could drive PEP stocks and the wider market

As part of the much anticipated start to the earnings season, PepsiCo (NASDAQ: PEPwill be one of the first of the “big names” to report revenue. The company will present its second quarter earnings report before the market opens on July 12. Analysts Followed by MarketBeat expects earnings per share of $1.72 on revenue of approximately $19.5 billion.


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However, this earnings season will be less about whether a company beats or misses and more about their outlook for the remainder of 2022. In that context, PepsiCo’s outlook is likely to foreshadow investors looking for any sign of a market turnaround.

I won’t insult you with an exaggeration to say that this is the most important earnings season ever. However, it has an excessive meaning. That’s because many analysts are warning of an “earnings recession” that will begin in the quarter just ended. If so, then a company like PepsiCo will have a lot to say about the state of the American consumer.

Will the pandemic rally end?

PepsiCo is not just a beverage company. They have become a snack giant. That has positioned the company as a defensive stock. This was fully visible during the pandemic. Consumers began stockpiling their pantries, which took some of the sting out of the contraction in restaurants and nightlife.

That trend continued into 2021. The company has had at least six consecutive quarters in which earnings per share (EPS) and revenue were higher year on year (YOY). Not surprisingly, PEP stocks are up 64% since the start of the pandemic.

But growth is slowing. If investors look at the company’s full-year 2021 results compared to all of 2020, they’d be happy to see an estimated gain of about 13% in both EPS and revenue. That said, PepsiCo’s growth in the “what have you done for me lately” category is slowing.

Assuming analysts’ expectations are correct, PepsiCo will have trailing 12-month earnings growth of 4%. And if you compare the first two quarters of 2022 with the same two quarters in 2021, growth will only be around 2%.

Will Pepsi’s guidance hiss or hiss?

In its latest earnings report, PepsiCo forecast organic sales growth of approximately 8%. Investors will be watching closely to see if the company enforces these guidelines. We believe the company is lowering its forecast by a percentage point or two.

During the company’s latest earnings call, PepsiCo CEO Ramon L. Laguarta this review offered of the consumer’s mood:

“… we think that consumers are very early in this process of adapting to the new inflationary environment. I think there will be more new consumer behaviors adapting to the new reality… Consumers will stop doing certain things that they were doing, going out more, maybe traveling, etc. So we think we’re early in the process I think our categories normally do pretty well in inflation [environments]†

We agree that PepsiCo has pricing power. But with the CPI coming out this week and likely showing inflationary pressures not abating, the company is likely to report continued pressure on its margins. So it wouldn’t be surprising if the company cuts that 8% by a percentage point or two. If so, that will confirm what many analysts and investors expect. Weak earnings expectations will cut across all sectors, even defensive stalwarts like PepsiCo.

Growth is still growth

I don’t want to give the wrong impression by claiming that PepsiCo is likely to lower its rating. PEP stock is down just 1.5% in 2022 the day before earnings and it’s up about 3% in the past 30 days. In today’s market, that’s nothing to worry about.

And that doesn’t include the company’s dividend, which pays $4.60 year-over-year and currently has a dividend yield of 2.69%. Not to mention that the company has risen, a dividend king has increased its dividend in each of the past 51 years. That can go a long way in protecting an investor’s overall return.

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