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Guidance Lifts Pepsico, Double-Digit Gains Are Still In Sight

Monday, July 13, 2020 | Thomas Hughes
Guidance Lifts Pepsico, Double-Digit Gains Are Still In SightPepsico Was Already A Buy

Pepsico (NASDAQ: PEP) was a buy long before it released calendar 2nd quarter earnings. The company is the second-largest soft drink brand on the planet and a well-diversified, dividend-paying consumer staple. When it comes to the dividend, Pepsico’s pedigree bears the hallmarks of royalty. With 48 years of consecutive increases under its belt, the company is one of the best payers on the market.

What plagued Pepsic before the earnings release, if anything, was uncertainty. With the COVID-19 pandemic still in play companies and analysts alike have been loath to make predictions that really count. Today’s news put all that uncertainty to rest. Pepsico’s moves into snacks and packaged foods was a wise move and helping the company not only survive the pandemic but thrive.

Diversity Pays Off

Pepsico reported a slight decline in YOY earnings for the 2nd quarter but all in all, the report was quite good. Net revenue of $15.95 billion fell only -3.0% versus a consensus closer to -6.0% as sales in categories exceeded expectations. At the organic level, revenue growth came in at -0.3% versus the expected -2.8% due to notable strength in the Snacks segments of the business.

Some had questioned Pepsico’s move to snacks when it began diversifying for growth a few years ago. Those moves paid off in spades over the last quarter with sales at Frito Lay surging 7% and Quaker more than 23%. Notably, both Frito Lay and Quaker are brands found in virtually every pantry across America, in some form or another, so trends in these segments are likely to be sticky.

No Guidance But The Market Can Read Between The Lines

Like so many others, Pepsico refrained from giving guidance on the coming quarter or full-year but did make some positive comments to reassure the market. To start, Pepsico says it has ample liquidity and flexibility to meet business needs and return cash to shareholders. While not guidance, it implies that business is at least stable. Pepsico went on to say its plans for returning cash totaled $7.5 billion in dividends and share repurchases. Using basic math that means investors can expect the dividend, which was just increased a month ago, to remain safely stable for the next fiscal year.

“as restrictions and closures eased and population mobility improved as the quarter

progressed, we also saw an improvement in our business performance and channel mix dynamics. However, the environment has remained volatile and much uncertainty remains about the duration and long-term implications of the pandemic. As a result, we are not providing a financial outlook for the fiscal year 2020 at this time. However, we continue to believe we have ample liquidity and flexibility to meet the needs of our business and return cash to shareholders.”

Looking forward, we can expect to see the analysts up their estimates and/or price targets for Pepsi this year. The 2nd quarter results put the company on track to easily surpass this year’s consensus. The YTD totals are shy of the 50% mark for the year but there are several factors in Pepsico’s favor. The second quarter of the year coincided with the bulk of the economic closing so most of the pain to be felt by Pepsico has already happened, and the second half of the year is always the best.

 The Technical Outlook: Bullish, With All-Time Highs In Sight

The analysts are generally bullish on this stock with an even number of neutral, bullish, and very bullish ratings. Their consensus price target is near $145 but that’s a very conservative target considering the companies position and 3.0% dividend yield. A touch to the present all-time high of $147 is what the market should be expecting at least. Today’s action has the stock moving up from a very strong support level and confirming a rebound of secular proportion. On a technical basis, assuming today’s move does indeed confirm a continuation of the rebound, investors should expect a move closer to 30%.

Guidance Lifts Pepsico, Double-Digit Gains Are Still In Sight

Companies Mentioned in This Article

CompanyBeat the Market™ RankCurrent PricePrice ChangeDividend YieldP/E RatioConsensus RatingConsensus Price Target
PepsiCo (PEP)2.1$138.28+0.3%2.96%28.28Buy$142.87
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