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PepsiCo (PEP) Likely to Beat on Q1 Earnings: Stock to Gain?

We expect PepsiCo, Inc. PEP to beat expectations when it reports first-quarter 2016 results on Apr 18, before the market opens. Last quarter, the company delivered in-line results.

Let’s see how things are shaping up for the upcoming 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 components.

Zacks ESP: Pepsi’s http://www.zacks.com/earnings/earnings-surprise-predictions/">Earnings ESP, which represents the difference between the Most Accurate estimate (83 cents) and the Zacks Consensus Estimate (81 cents), stands at +2.47%. This is meaningful and indicates a likely positive earnings surprise.

Zacks Rank: Pepsi has a Zacks Rank #3 (Hold). Note that stocks with a Zacks Rank #1 (Strong Buy), 2 (Buy) and 3 have a significantly higher chance of beating earnings. Conversely, the Sell-rated stocks (Zacks Rank #4 and 5) should never be considered going into an earnings announcement.

The combination of Pepsi’s Zacks Rank #3 and +2.47% ESP makes us confident of an earnings beat.

What's Driving the Better-than-Expected Earnings?

Last quarter, the company witnessed an improvement in its North American business – mainly snacks – though partially offset by weakness in some of the international markets. Moreover, Pepsi is making higher profits in its North American Beverage (NAB) business. At the last conference call, management stated that 2015 was possibly the best year in terms of financial performance by NAB in recent times. The upside was driven by improving economy, better industry pricing dynamics and consistent positive innovation.

We expect Frito-Lay snacks sales to remain strong and NAB profits to be higher in the soon to be reported quarter.

Despite sales and profits improving in the North American business, Pepsi’s growth will likely be hampered by economic slowdown in many emerging countries, going forward.

Also, Pepsi is facing global macroeconomic headwinds – weakening international currencies, economic slowdown in many emerging countries, political and social unrest in some regions as well as increased government regulation. We expect the headwinds to hurt sales in some key international markets in the first quarter as well.

Stocks to Consider

Some stocks in the broader food/beverage sector that have both a positive Earnings ESP and a favorable Zacks Rank include:

The Kraft Heinz Company KHC with an Earnings ESP of +6.56% and a Zacks Rank #2.

Kellogg Company K with an Earnings ESP of +4.30% and a Zacks Rank #3.

Flowers Foods, Inc. FLO with an Earnings ESP of +6.90% and a Zacks Rank #3.

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PEPSICO INC (PEP): Free Stock Analysis Report
 
KELLOGG CO (K): Free Stock Analysis Report
 
FLOWERS FOODS (FLO): Free Stock Analysis Report
 
KRAFT HEINZ CO (KHC): Free Stock Analysis Report
 
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