Why Is PepsiCo (PEP) Down 13% Since Last Earnings Report?

A month has gone by since the last earnings report for PepsiCo (NASDAQ:PEP). Shares have lost about 13% in that time frame, outperforming the S&P 500.

Will the recent negative trend continue leading up to its next earnings release, or is PepsiCo due for a breakout? Before we dive into how investors and analysts have reacted as of late, let's take a quick look at its most recent earnings report in order to get a better handle on the important drivers.

PepsiCo Surpasses Earnings and Sales Estimates in Q4

PepsiCo has reported solid fourth-quarter 2019 results, wherein earnings and sales surpassed estimates. However, the company’s core earnings per share (EPS) declined year over year, owing to increased SG&A expenses, which also hurt its core operating margin.

Quarter in Detail

PepsiCo’s fourth-quarter core EPS of $1.45 beat the Zacks Consensus Estimate of $1.43. However, core EPS declined 2.7% year over year. In constant currency, core earnings were down 2.5% from the year-ago period. The company’s reported EPS of $1.26 declined 73.9% year over year.

Net revenues of $20,640 million advanced 5.7% year over year and surpassed the Zacks Consensus Estimate of $20,349 million. On an organic basis, revenues rose 4.3%. Foreign currency effects on revenues and earnings remained neutral in the fourth quarter.

Revenue growth, on a reported and organic basis, was primarily driven by strength in all of the company’s businesses as well as robust pricing and volume. Notably, all segments witnessed organic and reported revenue growth in the fourth quarter, except for QFNA, wherein revenues were flat. This was driven by strong progress in its strategic priorities, and investments made in its capabilities, brands, manufacturing and go-to-market capacity to boost growth.

Total volume was up 1% in the reported quarter. Meanwhile, volume for organic snacks/food and beverage increased 2% each in the reported quarter. Meanwhile, net pricing improved 3% in the fourth quarter, driven by strong pricing across all segments.

On a consolidated basis, reported gross margin expanded 49 basis points (bps), while core gross margin improved 20 bps. Reported operating margin expanded 62 bps, while core operating margin declined 115 bps. The decline in operating margin was mainly owing to higher SG&A expenses.

Segment Details

Reported revenues improved 15% in Europe, 8% in APAC, 5% in Latin America, 4% in PBNA, and 3% each at FLNA and AMESA segments. Meanwhile, organic revenues increased 9% at APAC, 8% at AMESA, 6% each at Europe and Latin America, and 3% each at FLNA and PBNA segments. Moreover, reported and organic revenues at the QFNA segment remained flat.

Operating profit (on a reported basis) declined 21% for the QFNA segment and 11% for AMESA. However, it grew 28% for Europe, 16% for Latin America, 5% for PBNA, and 3% each for APAC and FLNA segments.

Financials

The company ended 2019 with cash and cash equivalents of $5,509 million, long-term debt of $29,148 million, and shareholders’ equity (excluding non-controlling interest) of $14,786 million.

Net cash from operating activities was $9,469 million as of Dec 28, 2019, compared with $9,415 million as of Dec 29, 2018.

Guidance

For 2020, PepsiCo expects organic revenue growth of 4%. Further, the company anticipates a 7% increase in core constant-currency EPS. Core effective tax rate is estimated to be nearly 21% in 2020.

Moreover, the company estimates foreign currency to impact reported revenues and core EPS growth by nearly 1 percentage point in 2020 based on current rates. Including currency impacts, it anticipates core earnings of $5.88 per share in 2020, suggesting 6% growth from $5.53 earned in 2019.

Further, management plans to return $7.5 billion to shareholders through dividend payments worth $5.5 billion and share repurchases of $2 billion. Free cash flow is estimated to be $6 billion. Operating cash flow is expected to be $11 billion, with net capital spending of $5 billion.

How Have Estimates Been Moving Since Then?

Estimates review followed a downward path over the past two months.

VGM Scores

Currently, PepsiCo has an average Growth Score of C, a grade with the same score on the momentum front. Following the exact same course, the stock was allocated a grade of C on the value side, putting it in the middle 20% for this investment strategy.

Overall, the stock has an aggregate VGM Score of C. If you aren't focused on one strategy, this score is the one you should be interested in.

Outlook

PepsiCo has a Zacks Rank #3 (Hold). We expect an in-line return from the stock in the next few months.