PepsiCo (PEP): What Will Q2 Earnings Release Unveil?

PepsiCo, Inc. (NYSE:PEP) is all set to report first-quarter 2016 results on Jul 7, before the market opens. Last quarter, the company delivered a positive earnings surprise of 9.88%.

The food/beverage company has delivered positive earnings surprises in the past four quarters with an average surprise of 6.09%.

Let’s see how things are shaping up for this announcement.

PEPSICO INC Price and EPS Surprise

PEPSICO INC Price and EPS Surprise | PEPSICO INC Quote

Factors to Consider?

Pepsi has been doing well owing to its significant innovation, ongoing revenue management strategies, improved productivity and better market execution. Notably, despite a volatile macroeconomic environment, slowing growth rate and significant currency headwinds, Pepsi has done well in the emerging markets. On top of it, Pepsi has been seeing higher volumes and profits in the North American segments – both snacks and beverages - due to an improving economy, better industry pricing dynamics and positive innovation consistently.

We expect Frito-Lay snacks sales to remain strong and NAB profits to be higher in the soon-to-be-reported quarter as well.

However, Pepsi expects the global macroeconomic headwinds – weakening international currencies, economic slowdown in many emerging countries, political and social unrest in some regions, and increased government regulation – to continue in the second quarter.

Gross margin growth rates are expected to be sequentially slower than the first quarter. This is due to expected raw material inflation (including the transaction-related Fx impact) compared with modest deflation in the first quarter. In the first quarter, core gross margin improved 130 basis points.

Earnings Whispers

Our proven model does not conclusively show that Pepsi is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1 (Strong Buy), 2 (Buy) or 3 (Hold) for this to happen. That is not the case here, as you will see below.

Zacks ESP: The Earnings ESP is -2.34% as the Most Accurate estimate stood at $1.25 and the Zacks Consensus Estimate is higher at $1.28.

Zacks Rank: Pepsi’s Zacks Rank #2 increases the predictive power of ESP. However, we need to have a positive ESP to be confident about an earnings beat.

We caution against stocks with a Zacks Rank #4 or 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions.

Stocks to Consider

Here are some food stocks that have both a positive Earnings ESP and a favorable Zacks Rank:

The Kraft Heinz Company (NASDAQ:KHC) , with an Earnings ESP of +2.82% and a Zacks Rank #2.

Aramark (NYSE:ARMK) , with an Earnings ESP of +10.71% and a Zacks Rank #3.

Post Holdings, Inc. (NYSE:POST) , with an Earnings ESP of +12.77% and a Zacks Rank #1.