Consumer-staples stocks have taken a beating in recent weeks, and PepsiCo is no exception. As the beverage and snack giant prepares to release its earnings report on October 10, investors are hopeful that the stock will rebound.
In today’s market, consumer staples seem to be out of favor. Despite the economy avoiding a recession thus far, investors are shying away from safety. The Consumer Staples Select Sector SPDR exchange-traded fund (XLP) has dropped 13% since its peak in May. On top of that, the 10-year Treasury yield recently reached its highest level in 16 years, diminishing the appeal of staples’ dividends. Adding to the negativity is a panic among investors who fear that weight-loss drugs may cause a decline in snack and soda sales. PepsiCo (PEP) has experienced an 18% decline in its stock price during this period.
However, PepsiCo’s upcoming earnings report could turn things around. Analysts are anticipating a 6% increase in sales to reach $23.4 billion for the third quarter, according to FactSet. Operating margins are expected to rise by approximately 0.1% to 16.4%, contributing to a projected 9% growth in earnings per share to $2.15.
The most promising aspect is the recent growth in shipments for Pepsi’s Frito-Lay North America division, which has seen an increase of over 6%, as reported by Goldman Sachs’ analysis of Nielsen data. Shipments for Pepsi Beverages North America have also shown growth, albeit slightly lower at just under 5%.
Goldman analyst Bonnie Herzog shares her optimism, stating, “We expect a slight top and bottom-line beat, driven by strong underlying momentum internationally, and healthy demand for Frito-Lay North America and PepsiCo North America as consumer elasticities remain resilient despite the challenging macro environment.”
As PepsiCo gears up to report its earnings, investors eagerly await the results and the potential for a positive impact on the stock price. Much of the recent sales gains have been driven by price increases, but the goal is to have volume growth do the heavy lifting, especially as Pepsi faces competition from cheaper private-label offerings. Goldman expects mid-single-digit volume growth in 2024 with fewer price increases, while the consensus analyst sales forecast calls for about 5% total sales growth in 2024, to $96.8 billion. That would help bring EPS up just under 8%, to $8.06.
Returning Emphasis to Increased Volume Growth
Pepsi stock fell 5.2% on Thursday on concerns that weight-loss drugs will cause snackers to forgo Frito-Lays and other products. Those concerns seem overblown, says RBC analyst Nik Modi, who notes that the cost and availability could make the worst-case scenario not nearly as bad as the market has started to price in.
The recent declines also mean that Pepsi stock is cheaper than it has been in a while. It trades at 19.4 times 12-month forward earnings, down from its five-year average of 23.2 times. And while its valuation is 9% higher than the S&P 500’s current 17.7 times earnings, that’s less than a quarter of its typical 40% premium. Shares are at an “attractive valuation, especially considering PEP’s accelerating growth,” writes Herzog.
Expectations for Stock Price Performance
Expect a sparkling stock price performance after earnings.