Pepsi Beats Q2 Estimates, Raises FY17 EPS View

Pepsi cans stacked - photo - July 2017The world’s second largest beverage company PepsiCo Inc. (NYSE: PEP) reported better than expected revenues and earnings in its second-quarter of fiscal 2017. The company also raised its fiscal 2017 earnings outlook. On the basis of efforts taken by the company to increase margins, offset falling demand for fizzy drinks and remain on a growth track, we expect the stock, which closed at $114.93 on Friday, to rally further.

The New York-based brand owner of Frito-Lay, Gatorade, Mountain Dew, Tropicana, Doritos and Quaker reported second-quarter revenues of $15.71 billion, up 2% from $15.40 billion in the corresponding period of 2016. Even though volumes were flat, the company’s revenue increased due to a 1% increase in net pricing. The Wall Street analysts were expecting revenues of $15.61 billion for the quarter.

The Q2 2017 GAAP net income increased 5% to $2.11 billion or $1.46 per share, from $2.01 billion or $1.38 per share in the same period last year. Excluding charges, core attributable earnings for the recent quarter were $2.16 billion or $1.50 per share, up from $1.97 billion or $1.35 per share in the prior year’s second-quarter. Pepsi’s core earnings include a one time payment of $0.06 per share from the sale of its 4.5% stake in British bottler Britvic. On average, analysts polled by Thomson Reuters anticipated earnings of $1.40 per share for Q2 2017. For the past five quarters in a row, Pepsi has beaten the estimates of analysts.  

As a socially responsible company, Pepsi continues to introduce “guilt-free”, healthier, non-carbonated drinks in developed and emerging markets. Additionally, the company has tested natural sweeteners in sodas, offered grain-based snacks, and tried new frying methods to decrease fat in potato chips. Pepsi expects such introductions to offset the declining market for products, which are considered unhealthy.

Pepsi now expects core earnings of $5.13 per share for fiscal 2017, compared to the prior outlook of $5.09 per share. The Wall Street analysts anticipate earnings of $5.14 per share for fiscal 2017. Last year, the company reported core earnings of $4.85 per share. Pepsi also maintained its prior organic revenue growth outlook of 3%. Furthermore, the company stated that it continues to expect free cash flow of $10 billion from operations, share repurchases to the tune of approximately $2 billion, and dividend payments of approximately $4.5 billion.

As seen in the image below, the stock has bounced off the support at 112.50. The sub-twenty reading of the stochastic oscillator indicates an oversold scenario. Likewise, the momentum indicator has made a positive divergence with the price. Thus, a rally in the stock can be expected.

Pepsi - Technical Analysis - 17th July 2017

To gain from the uptrend, we plan to buy a high or above option valid for a period of one week. To minimise risk, we would open the trade when the stock trades near $114 in the NYSE.

Disclaimer: The trading analysis offered here is our opinion. It is not provided as trading advice, merely an indication of our trading plan. We cannot guarantee success and we encourage traders to incorporate a strong money management strategy to limit losses. Please use this article as part of your own research before formulating strategies prior to trading.