After what looks to be an earnings beat on the top and bottom lines for PepsiCo (NASDAQ:PEP), investors may wonder if now is the time to take a nibble or two at the company’s stock. The answer to that question will depend less on what the company reports and more on what the company says.
Pepsi recorded a year-over-year revenue decline of just 3% in its most recent quarter. I bring that up, because the company’s quarter ran from April through June. This was during the most extreme of the lockdown measures were in place. Beverages were the biggest loser with revenue growth declining by 7%. As expected, the effect of consumers stuffing their pantries was not enough to offset the on-premise venues that were closed to the company.
Yet despite that, the company managed a sequential gain from the prior quarter that ended in March. And it’s important to note that even in that quarter, Pepsi managed a small YOY gain even as lockdown measures were being enacted.
This quarter, analysts are projecting Pepsi to report $1.47 in earnings per share (EPS) on revenue of $17.26 billion. The earnings whisper number (which is Wall Street’s best guess) has Pepsi coming in with $1.52 EPS. If it accomplishes that, the numbers would be in-line with the prior year. And that may be enough to encourage investors as Pepsi approaches what has historically been its biggest quarter from a revenue perspective.
Will it be a happy holiday season?
It sounds like a broken record, but it’s all about the future outlook. For many investors, the last quarter was a write-off. With a few notable exceptions, investors knew the results were going to be bad and weighed down by pandemic concerns. But now, even with uncertainty still hanging over the broader economy, investors want more specifics.
That may not be entirely fair. The novel coronavirus still presents a challenge to businesses for two reasons. First, the contagious nature of the virus itself is making it difficult for large venues to open. And restaurants and bars remain a stubborn, if not a bit expected, vector of transmission.
And even with Pepsi itself, the virus is causing increased spending on personal protective equipment (PPE) to prevent the spread of the virus among its employees. That was a drag on the company’s core operating margin. Investors will be looking to see that margin improve even if it is just slightly.
But politics is playing a role in the outlook for the virus. You don’t have to be a science denier to admit that the virus has been politicized. Shocking, I know. And with the presidential election now just about a month away, there’s no incentive for things to get better.
The health of the consumer’s finances is also a concern
The double whammy of our nation’s current situation is that, while unemployment has been going down, it’s still uncomfortably high, particularly in segments where the loss of income is the most challenging.
A lack of disposable income could mean less spending on some of the company’s Frito-Lay brand snack foods in exchange for generic items. Frito-Lay is one of the key drivers of revenue for the company and sets it apart from a company like Coca-Cola (NYSE:KO).
That being Pepsi may benefit from people who will be staying home for the holidays. Many college students will be returning home by Thanksgiving for a prolonged winter break. This may lead to a rise in pantry stuffing as families adjust to extended time in close quarters.
Pepsi did increase its dividend
Pepsi increased its dividend for the 48th consecutive year. At a time when many companies are suspending or cutting their dividends, this is no small accomplishment. In a market that is expected to remain volatile for the remainder of the year, that isn’t the worst reason to consider putting Pepsi on your holiday shopping list.
The bottom line on Pepsi stock
There are very few sure things in the stock market these days. And Pepsi is no different. The company has likely seen weathered the worst of the pandemic, but that doesn’t mean the snack and beverage company is back to normal.
That being said, the company has managed to slough off most of its pandemic losses and is now positive for the year despite the September sell-off. Pepsi has been a solid defensive stock, and investors would be wise to play a little defense right now. With a tasty dividend and a little growth to go with it, it’s okay to snack on some Pepsi stock.
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