PepsiCo, Inc. PEP is set to report second-quarter 2015 results on Jul 9, before the market opens. Last quarter, it delivered a positive earnings surprise of 5.06%.
Let’s see how things are shaping up for this announcement.
Factors at Play
Despite the ongoing global macro challengesand significant currency headwinds, Pepsi did well in 2014 and so far in 2015. The company hasdelivered positive earnings and revenue surprises in five straight quarters. Strong global snacks performance, better execution and productivity gains have been driving the company’s results.
However, Pepsi expects to continue to face macroeconomic headwinds in 2015, mainly due to weakening international currencies and economic slowdown in many countries. In fact, at the first-quarter call, the company stated that it anticipates a greater-than-previously-expected Fx impact on its 2015 sales and profits. With around half of its revenues coming from outside the U.S., Pepsi’s sales and profits are being affected by significant currency headwinds as a result of the recent weakening of many foreign currencies versus the U.S. dollar.
Currency is expected to hurt earnings per share by 12% and revenues by 11% in the second quarter.Interest expenses are expected to be higher than the last year. Tax rate is also expected to increase sequentially.
Nevertheless, with a strong snacks business, robust international growth and aggressive cost savings, the company looks well placed to deliver strong results in the future quarters as well.
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 ESPand a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here, as you will see below.
Zacks ESP: The Earnings ESP is 0.00% as both the Most Accurate estimate and the Zacks Consensus Estimate stand at $1.23.
Zacks Rank: Pepsi’s Zacks Rank #3 (Hold) when combined with a 0.00% ESP, makes surprise prediction difficult.
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 momentum.
Stocks to Consider
Some stocks in the broader food/beverage sector that have both a positive Earnings ESP and a favorable Zacks Rank are:
Cal-Maine Foods, Inc. CALM, with an Earnings ESP of +5.17% and a Zacks Rank #1 (Strong Buy).
Kellogg Company K, with an Earnings ESP of +3.30% and a Zacks Rank #3.
Tyson Foods, Inc. TSN, with an Earnings ESP of +4.21% and a Zacks Rank #3.
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