PepsiCo's (PEP) Shares Surge On Q1 Earnings & Revenue Beat

PepsiCo, Inc. (NASDAQ:PEP) reported first-quarter 2018 (ending Mar 24) results, with earnings and revenues both beating the Zacks Consensus Estimate. Notably, this is the eighth consecutive quarter of positive earnings surprise. The improvement was mainly attributable to strong performances in its international divisions, propelled by higher revenue growth in developing and emerging markets.

PepsiCo’s shares have inched up 0.8% in the pre-trading session following the earnings release.

Earnings

PepsiCo’s first-quarter core earnings per share (EPS) of 96 cents beat the consensus mark of 92 cents by 4.3% and increased 3% year over year. In constant currency terms, adjusted earnings remained unchanged from the year-ago period.

Core earnings exclude restructuring and impairment charges, and commodity mark-to-market net impact. The company reported earnings of 94 cents per share, reflecting an increase of 3% year over year. Foreign exchange translation had a positive impact of 2% on reported EPS.

Sales

Net revenues of $12.56 billion increased 4.3% from the year-ago level. Foreign exchange (Fx) had a 2% negative impact on revenue growth and pricing had a positive impact of 2%. Reported revenues also topped the Zacks Consensus Estimate of $12.41 billion.

Excluding the impact of Fx, revenues increased 2.3% on an organic basis, primarily driven by higher demand for food/snacks in the Latin America, Asia, Middle East and North Africa (AMENA), Europe Sub-Saharan Africa (ESSA) and Frito-Lay North America (FLNA) segments. Notably, overall organic sales growth was the same as recorded in the last reported quarter.

Total volume grew 1% in the quarter, whereas volumes remained unchanged in the previous quarter. While organic snacks/food volumes increased 3% (better than 2% growth witnessed in the fourth quarter), beverage volumes dropped 1% (versus down 2%).

Quarterly Segment Details

Revenues decreased 1% at the North America Beverages (NAB) segment. That said, the company’s revenues improved 15% in ESSA, 14% in Latin America, 7% in AMENA and 3% in FLNA segments. Meanwhile, revenues at QFNA remained unchanged in the quarter from the year-ago level.

Notably, the company’s NAB segment was negatively impacted by higher input costs and operating cost inflation that substantially offset productivity gains. The results were also adversely affected by a bonus, extended to certain U.S. employees in connection with the TCJ Act. Meanwhile, each headwind decreased the operating profit performance by 8%.

Operating profits (on a reported basis) decreased 23% in NAB and 5% in QFNA segments. However, the same grew 42% in Latin America, 23% in ESSA and 10% in AMENA segments. Meanwhile, operating profit remained unchanged at FLNA division.

Margins

Core gross margin and operating margin contracted 75 basis points (bps) and 110 bps, respectively.

Financials

Cash and cash equivalents were $13.4 billion as of Mar 24, 2018, up from $10.6 billion as of Dec 30, 2017. Long-term debt was $31.9 billion at the end of the quarter, up from $33.8 billion as of Dec 30, 2017.

Net cash used for operating activities was $1.3 billion in the quarter, compared with $193 million in the year-ago period.

2018 Guidance Reaffirmed

PepsiCo expects full-year organic revenue growth (excluding headwinds from currency and structural changes) to be approximately in line with the 2017 growth rate of 2.3%. Currency is projected to have a neutral effect on the top and bottom lines.

PepsiCo expects core EPS of $5.70, showing an expected growth rate of 9%.

Also, management plans to return $7 billion to its shareholders, through dividends ($5 billion) and share repurchases ($2 billion). Free cash flow is estimated at around $6 billion.

The company carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Peer Releases

The Coca-Cola Company (NYSE:KO) started off 2018 on a strong note, beating the Zacks Consensus Estimate on both the counts in first-quarter 2018.

Dr Pepper Snapple Group Inc.’s (NYSE:DPS) first-quarter 2018 earnings missed the Zacks Consensus Estimate while revenues beat the same. In the first quarter, adjusted earnings per share of 98 cents declined 3% year over year and missed the consensus estimate by 4.9%. Net sales of $1.59 billion surpassed the consensus estimate of $1.57 million by 1.3% but rose 5.6% from the year-ago quarter.

Upcoming Peer Release

Cott Corporation (NYSE:COT) is scheduled to report quarterly results on May 3.

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