
Two Big Questions Pepsi Must Answer for Wall Street
Wall Street likely needs PepsiCo (PEP) - Get Report to quench its thirst for answers on two important topics when the company reports second-quarter earnings on Thursday.
Analysts are estimating the beverage and snack giant's sales during the quarter fell 3.5% from the prior year to $15.36 billion. Earnings are seen dropping 2.2% year over year to $1.29 a share. Pepsi shares have risen an impressive 12% over the past year compared to a 1.5% gain for the Dow Jones Industrial Average as it has found success selling smaller cans of soda and healthier snacks to waist-line watchers in the U.S., while also benefiting from aggressive cost-cutting and share repurchase programs.
"We continue to view the stock as a solid long-term investment -- North American beverage profitability is improving and the company has high earnings per share visibility over the coming years, something that is being discounted in the market considering its relatively cheap valuation compared to Coca-Cola (KO) - Get Report ," said Jim Cramer and Jack Mohr, co-portfolio managers of the Action Alerts PLUS Charitable Trust Portfolio , which owns PepsiCo.
But to keep its stock relatively hot, Pepsi will have to temper investor concerns on two fronts.
1. How Bad Is Business Overseas?
Pepsi surprised Wall Street by reiterating its full-year earnings outlook in April due to global growth concerns, despite a strong start to the year. For 2016, Pepsi said it sees earnings of $4.66 a share -- Wall Street continues to be more optimistic though, anticipating earnings of $4.73.
"There are two challenging places around the world right now in particular, one is South America, which is going through its ups and downs -- when I say South America I am not saying Mexico which is doing quite well -- but the balance of South America is certainly facing some challenges," Pepsi Vice Chairman and Chief Financial Officer Hugh Johnston told TheStreet in an interview in April. He added, "The second area where things are a bit more challenging is Eastern Europe, in particular Russia." PepsiCo generates about 13% of its revenue from Latin America and 17% from Europe Sub-Saharan Africa.
Since April, economic conditions overseas have been mixed at best. According to Markit, GDP in the eurozone rose a modest 0.2% in the second quarter, down from 0.4% in the first three months of the year. Growth in the EU may cool further in the third quarter in light of Great Britain's vote to leave the European Union, which has roiled global stock markets. Meanwhile, economies in South America such as Brazil remain in peril due to high levels of inflation and unemployment.
Wall Street is likely banking on Pepsi reiterating its 2016 earnings outlook again despite overseas economic volatility. Therefore, any downward revision as a result of international growth concerns may be viewed unfavorably.
2. Can Diet Soda Sales Rebound This Year?
Less than a year after removing controversial artificial sweetener aspartame from Diet Pepsi, PepsiCo has decided to bring back its previous formula in a limited number of packages in September. The drink's new light blue cans will be labeled with "Classic Sweetener Blend." Aspartame-free Diet Pepsi will continue to be offered, while Pepsi MAX will be re-introduced to U.S. consumers as Pepsi Zero Sugar.
"Although the initial switch to a formula without aspartame was an innovative move given consumer concern about the sweetener, the rollout was ultimately unsuccessful and we applaud management for biting their pride and making the switch back," said Cramer and Mohr.
However, investors likely want to gain confidence that the shakeup in the company's still important diet soda business will lead to improved sales later this year. Indeed, Pepsi has some proving to do in this department. Diet Pepsi volume declined 5.8% last year, according to data from Beverage Digest. Sales trends worsened in the first quarter. Diet Pepsi volume fell 10.6%, almost double the 5.7% decline for Diet Coke, which stayed with aspartame as its primary sweetener.









