Investors should stay clear of the iconic beverage manufacturer. Shares rose slightly in Thursday trading.
PepsiCo posted revenue of $16.03 billion for the quarter which beat analysts' estimates of $15.89 billion, but was well below the $16.33 billion reported for the same quarter last year. Despite the lower revenue, Pepsi was able to post higher earnings per share $1.37, than the $0.36 it reported last year and beat Wall Street's $1.32 estimate.
The biggest reason PepsiCo had such a large jump in EPS this quarter compared to last year was because in 2015 the company had a $1.35 billion impairment charge related to its business in Venezuela. If Pepsi hadn't taken that charge, EPS this year would have most likely been lower on a year-over-year basis.
Another issue that may be skewing Pepsi's results is dramatically lower food costs in the U.S. over the past nine months. In their recent earnings reports, large grocery stores such as Kroger and even Wal-Mart said lower food costs have hurt sales, PepsiCo didn't say much about that hurting their business, but the company noted that lower raw material costs was helping their margins and EPS.
Investors need to ask what happens when raw material costs go higher? What will PepsiCo's earnings per share look like, especially if sales continue to decline?
Pepsi's earnings report wasn't all bad. The company highlighted that its product and geographic mix was good. The company said about 45% of its revenue now comes from "guilt free" products, which are categorized as beverages containing less than 70 calories per 12 ounces and snacks which have reduced amounts of salt and saturated fat.
The 45% figure is promising for a company that made its name selling sugar-filled beverages. But the falling revenue is still a sign that more needs to be done and at a faster rate. PepsiCo appears to be improving in no small part because of its snack business. That's more than can be said about competitor Coca-Cola.
Having said that, Pepsi hasn't done enough to prevent a few more quarters of declining figures. Investors should remain on the sidelines until both revenue and earnings per share begin to grow, even if the increases are small.
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The author is an independent contributor who at the time of publication owned shares of Kroger.