28 April 2020

Will Strong Portfolio Give Fizz To PepsiCo’s Q1 Results?

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What’s happening: PepsiCo is all set to report its first-quarter results before the opening bell on Tuesday, April 28.

What happened: The Purchase, New York-based company has maintained a healthy track record over the past two years, exceeding revenue estimates every quarter during this period.

With archrival Coca-Cola beating estimates when it reported results last week, PepsiCo is under significant pressure to do the same. Although seen as the main competitor for each other, the two companies have distinct advantages. Going by the fact that PepsiCo's shares have performance much better than Coca-Cola over the past three months, expectations from the upcoming earnings call is also higher.

Expectations for the quarter: The food and beverage giant is expected to report growth in both revenues and earnings for the first quarter.

  • The consensus estimate for revenue stands at $13.2 billion, representing 2.5% growth from the same quarter last year.
  • The company is expected to report earnings of $1.03 per share, an improvement of 6.2% versus the year-ago quarter.

Why it matters: Coca-Cola enjoys a stronger position than PepsiCo in the global soft drinks market. On the other hand, PepsiCo is highly diversified, with 22 brands and a dominant presence in the snacks market. The diversification is expected to lift the company’s quarterly results.

With customers stockpiling goods amid lockdowns, there’s been a surge in demand for packaged foods, including the company’s Lays, Doritos and Quaker Oats brands.

PepsiCo has also strengthened its portfolio by acquiring various growth companies. The snacks and beverages company recently announced the acquisition of Rockstar Energy for $3.85 billion. PepsiCo also added more strength to its snacks segment by acquiring BFY Brands, the maker of PopCorners snacks, and Chinese snacks company Be & Cheery.

PepsiCo has a strong record of delivering value to its shareholders. Management had hiked dividend for the 48th straight year in February. However, the company’s dividend yield of 2.84% is meaningfully lower than Coca-Cola’s 3.61%.

With the company having a presence in more than 200 countries, foreign currency fluctuations could prove to be a drag for PepsiCo. Loss of revenue from sales through restaurants and stiff competition from Coke are also expected to hurt results.

How the shares have performed so far: Shares of PepsiCo are down only 5% in the past three months, versus Coca-Cola’s decline of 19%. PepsiCo’s stock has been on a sharper uptrend over the past month, climbing 12%. Amid the optimism, investors seem a tad cautious ahead of PepsiCo’s results as the stock has remained broadly flat over the past five trading sessions.

What to watch: PepsiCo will be under pressure to beat estimates this quarter, with Coke delivering strong results. Investors are expecting the company to deliver healthy sales growth due to stockpiling. Investors also look forward to management’s comments on the impact of COVID-19 on the soft drinks segment and the outlook for the year.

The Markets Today

     

Investors will be focusing on US stocks today, ahead of some major earnings and economic reports scheduled for release later in the day.

Context: US stocks closed higher on Monday, with the Dow climbing for the fourth consecutive session. Investors cheered the news of various countries starting or planning to ease their lockdown restrictions. Investors also assessed earnings reports from various companies.

Details: After posting a 1.9% weekly decline, the Dow rebounded on Monday. Optimism was fuelled by various states, including Oklahoma, Alaska and Georgia, beginning to loosen lockdown measures on businesses. New York Governor Andrew Cuomo is also expecting the state to begin reopening after May 15.

In Europe, various governments disclosed plans to ease their restrictions, with the Spanish government planning to allow people to go for walks from May 2. Italy and Belgium also announced plans to ease some restrictions from May 4. France is expected to lift some restrictions from May 11.

The busiest earnings week kicked off on Monday, with giants like Apple, Alphabet, Microsoft and Amazon.com all set to disclose earnings this week.

Investors shrugged off weakness in oil prices as the WTI (West Texas Intermediate) crude for June delivery dipped 24.6% to settle at $12.78 a barrel yesterday.

In corporate news, General Motors announced plans to suspend dividend and share buybacks to preserve liquidity. Arconic warned of a 12% decline in its first-quarter revenue. Meanwhile, Deutsche Bank said it expects to report upbeat results for the quarter.

In other news, gold futures for June delivery declined 0.7% to settle at $1,711.90 an ounce. The 10-year Treasury note yield rose 6.1 basis points to 0.66%.

What to watch: Markets will be looking for earnings reports from various large companies, including Alphabet, Caterpillar, Ford Motor, Pfizer, United Parcel Service, PepsiCo and Starbucks.

Investors also await some economic reports, including US wholesale inventories, goods trade balance, S&P Case-Shiller home price index, CB consumer confidence and Richmond Fed manufacturing index. The S&P CoreLogic Case-Shiller home price index, which rose 3.1% in January, is expected to increase 3.3% in February. The Conference Board’s consumer confidence index is likely to decline to 88 in April, from its prior reading of 120.

Investors will continue to monitor the daily COVID-19 numbers, with the global number of cases surpassing 3,042,440. The US has so far confirmed over 988,450 coronavirus cases with around 56,250 deaths.

Other Markets: Asian indices closed mixed on Tuesday, with Japan’s Nikkei 225 and China’s Shanghai Composite index down by 0.06% and 0.16%. However, the Hong Kong’s Hang Seng Index closed higher by 1%.

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What else to watch today

     

Indonesia’s loan growth, Mexico’s balance of trade, Brazil’s loan growth, Saudi Arabia’s bank lending growth and money supply M3, Russia’s GDP, Argentina’s economic activity index as well as the US Redbook index.

 

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