The Real Driving Force Behind Pepsi’s Earnings Gains

Print Email

PepsiCo Inc. (NYSE: PEP) reported its third-quarter financial results before the markets opened on Tuesday and one key analyst has already weighed in on the company. For 24/7 Wall St.’s earlier coverage on the earnings report goes more in-depth on Venezuela.

The company posted $1.35 in earnings per share (EPS) on $16.3 billion in revenue, compared to consensus estimates from Thomson Reuters of $1.26 in EPS on revenue of $16.15 billion. In the same period of the previous year, the company reported EPS of $1.36 and $17.22 billion in revenue.

Merrill Lynch pointed out that Pepsi’s solid third-quarter results included upside to sales and profits across all three North America businesses and better-than-expected results relative to its forecasts. Full-year 2015 constant-currency core EPS guidance was increased from 8% to 9%, which implies $4.54 net of currencies, versus Merrill Lynch’s current forecast of $4.50. The consensus estimate calls for an EPS of $4.52 in 2015.

ALSO READ: 7 Fresh Analyst Stock Picks With Massive Upside

Merrill Lynch’s Bryan Spillane and Lisa Lewandowski stated in their report:

Note that the guidance includes a change of accounting treatment for Venezuela, in which Pepsi will no longer report the segment in its consolidated financial statements. We estimate that the effect of this change to be a $0.03 drag in the fourth quarter and $0.10 in full year 2016.

Other key considerations from the quarter that Merrill Lynch highlighted were:

  • Frito Lay North America volumes were +0.5% (there were some concerns in the market that it may be worse).
  • Quaker Foods posted strong margin growth against a difficult comparison.
  • Latin America segment margins were below our expectation, due to a combination of currency, Venezuela and a weakening macro backdrop.
  • Pepsi guided to the high end of its expected range for free cash flow ($7B).

As a result, Merrill Lynch reiterated a Buy rating for Pepsi with a $107 price objective.

Shares of Pepsi were up 1.6% to $97.33 late Monday morning. The stock has a consensus analyst price target of $104.33 and a 52-week trading range of $76.48 to $100.76.

ALSO READ: Huge Carl Icahn Energy Purchases Highlight Recent Insider Buying