PepsiCo beats Q1 2017 estimates, reaffirms FY17 EPS view

Despite reporting fiscal 2017 first-quarter results that beat analysts’ consensus, the stock of food and beverage company PepsiCo Inc (NYSE: PEP) remains range bound between $111.50 and $113.50. Analysts attribute the decline in the adjusted gross and operating margin for the poor performance of the stock.

However, as explained below, the company has performed well in spite of the currency headwinds. Thus, we anticipate a rally to begin soon.

The manufacturer of mountain dew, the number one flavored carbonated soft drink in the US, reported fiscal 2017 first-quarter revenue of $12.05 billion, up 2% from $11.86 billion in the first-quarter of 2016.

The net income for the recent quarter was $1.33 billion, an increase of 41% from $945 million recorded in the similar period last year.

PepsiCo

The earnings per share of $0.91 in Q1 2017 were higher than $0.64 per share reported in Q1 2016. Lower provision for income taxes and decrease in SG&A expenses were primarily responsible for the sharp increase in the net income.

Excluding the mark-to- market impact of commodities and restructuring and impairment charges, among others, the non-GAAP net income in the quarter ended March 2017 was $0.94 per share, compared with $0.89 per share in the quarter ended March 2016, and greater than analysts’ estimates of $0.91 per share.

The first-quarter 2017 results revealed that the core gross margins contracted 45 basis points, compared with 1Q16. Correspondingly, core operating margins declined 28 basis points.

Still, cost cutting initiatives, healthier snacks, and better price realization enabled the company to report impressive results. PepsiCo is investing heavily to develop healthier snacks such as unsweetened tea and baked chips. In this regard, the company claimed that it now generates 45% of its net revenue from healthier (PepsiCo calls it as “guilt-free”) products. Total volumes remained flat on y-o-y basis. Beverage volumes were almost unchanged, versus last year’s quarter, while organic snacks grew 1%.

The company ended March quarter with cash and cash equivalents of $9.53 billion, up from $9.12 billion at the end of December 26th , 2016.

For fiscal 2017, PepsiCo reaffirmed its previous earnings guidance of $5.09 per share. In the full year 2016, the company had reported earnings of $4.85 per share. Additionally, the management of PepsiCo is planning to return $6.5 billion in the form of share repurchases and dividends to shareholders. The strong increase in revenues, upbeat sales of healthy snacks, and reconfirmation of FY17 earnings outlook indicates that the stock would turn bullish soon.

The share price movement is confined within the ascending channel, as shown in the image below. The buying pressure continues to build up as indicated by the rising accumulation/distribution indicator and stochastic oscillator. Thus, we can expect the stock to rise and reach the other end of the channel.

The probable uptrend can be taken advantage by investing in a call option. The option should preferably remain valid for a period of one week. Likewise, it is better to invest when the stock of PepsiCo trades near $112.50 in the equity market.

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