We expect food/beverage giant, PepsiCo, Inc. (PEP), to beat expectations when it reports fourth-quarter and full-year 2013 results on Feb 13. Last quarter, it delivered a positive earnings surprise of 5.98%. Let’s see how things are shaping up for this announcement.
Why a Likely Positive Surprise?
Our proven model shows that Pepsi is likely to beat earnings because it has the right combination of two key ingredients.
Positive Zacks ESP: Expected Surprise Prediction or Earnings ESP, which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, stands at +1.98%. This is very meaningful and a leading indicator of a likely positive earnings surprise for shares.
Zacks Rank: Pepsi carries a Zacks Rank #3 (Hold) which, when combined with +1.98% ESP, makes us confident about a positive earnings beat.
Note that stocks with Zacks Ranks #1, 2 or 3 have a significantly higher chance of beating earnings. The Sell-rated stocks (#4 and 5) should never be considered going into an earnings announcement.
What is Driving the Better-Than-Expected Earnings?
Pricing and productivity gains and strong performance of the snacks business are expected to drive the better-than-expected earnings. These gains should make up for the aggressive marketing investments, higher commodity costs, an increased drag from forex and higher taxes and interest expenses.
Fourth-quarter revenues and earnings will be hurt by currency headwind of 3.0% and 4.0%, respectively. Further, structural changes (the Vietnam refranchising) are expected to hurt revenues by 0.5%. Commodity inflation is expected to be higher sequentially which, combined with incremental investments (funded by the Vietnam gain) and higher A&M expenses, will hurt margins. Net interest expense will also increase year over year. Though tax rate was lower in the third quarter, management expects it to increase significantly in the fourth quarter.
Other Stocks to Consider
Other stocks in the consumer staples sector that have both a positive earnings ESP and a favorable Zacks Rank are:
ConAgra Foods, Inc. (CAG), withEarnings ESP of +1.54% and a Zacks Rank #2 (Buy).
Mondelez International, Inc.(MDLZ), with Earnings ESP of +2.27% and a Zacks Rank #3.
Lorillard, Inc. (LO), with Earnings ESP of +1.18% and a Zacks Rank #2.
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