Pepsi Pops On Earnings, A New All-Time High Is In Sight

Pepsi Withdraws Guidance But So What …

Pepsico (PEP) announced its 1st quarter earnings this morning and joined the ranks of companies withdrawing their full-year guidance. While this news may seem bad at face-value let me say this; there are two types of companies withdrawing guidance.

The first group is companies whose businesses are flagging from pandemic strain and don’t believe they’ll hit their marks. The second group is companies whose businesses are booming because of the pandemic and are uncertain how full-year results will look.

Pepsico is in the second group. They’ve cut guidance because the previous guidance is “no longer applicable” due to the impact of COVID-19. What they didn’t cut was an expectation for share buybacks, dividends, and distribution increases.

From the Q1 report

“Given the uncertainties associated with the magnitude and duration of the COVID-19 pandemic on our business, the Company’s previous financial outlook regarding fiscal year 2020 is no longer applicable. However, the Company continues to expect:

• A core effective tax rate of approximately 21 percent; and
• Total cash returns to shareholders of approximately $7.5 billion, comprised of dividends of $5.5 billion and share repurchases of $2 billion.”

Pepsico Reports Strong First Quarter Results

At the headline level Pepsico performed much better than expected and that carries through the report. The company says revenue grew 7.8% to outpace consensus by nearly $0.70 billion. GAAP EPS missed by a small margin, adjusted EPS did not, due to a small decline in operating margins. Organic sales rose 7.9% with high-single-digit gains in all segments and regions.

The results are boosted by the pandemic but not the pandemic is not entirely responsible. The company has been working on a Faster, Stronger, Better initiative that includes investment at all levels.

“This gives us confidence that the investments behind our Faster, Stronger and Better framework are working - as we invest in our brands, supply chain and go-to-market systems, manufacturing capacity, capabilities and culture, and our society by integrating purpose into everything we do.”

An example of this is the companies push into the energy drink arena. Over the past quarter, Pepsico closed on the acquisition of Rockstar Energy Beverages and, in this report, announced a new deal with Bang. Bang is an energy drink brand launched in 2012. Pepsico’s deal makes it the sole supplier of Bang in the U.S., a move that helps cement its position within this highly-lucrative category.

"In the ultra-competitive energy category, Bang Energy has thrived, pioneering the performance energy segment and attracting the next generation of energy consumers. This alliance plays a central role in PepsiCo's overall energy-beverage strategy and enables us to significantly accelerate the distribution of Bang Energy to meet rising consumer demand,"

The Analysts Are Bullish Upward Revisions Are Still Expected

The average analyst rating is bullish and I’m not surprised; the company is a solid dividend payer with earnings growth already in the forecast. Before the Q1 results, the consensus for 2020 EPS growth was near 5.6%. Because of the Q1 results, up 10.7% vs the 6% expected, I see a chance for upward revisions to EPS and price targets over the coming quarters. With 9 of the 20 analysts with a current rating on the stock, there is ample fuel for an analyst’s driven rally to form.

Looking to the dividend, Pepsi is no Dividend King but not far from it. The company has been increasing the distribution annually for 47 years with no plans to stop now. We already know the company is expecting to up the distribution this year. Based on the figures they provided the increase will be in the range of 3.5% to 5%, depending on when and how many shares are repurchased.

The Technical Outlook: Is This A Vee-Bottom I See Before Me?

The technical outlook for Pepsico is bullish. The chart may not be a text-book Vee-bottom, more like an accentuated Head & Shoulders, but it is bullish. The stock corrected, just like every other stock in the market, and has since bounced. The bounce is strong, from a long-term support level, and supported by the indicators. Today’s news has the shares up more than 1.0% after retesting for support at the short-term moving average.

In the very-near-term, Pepsico shares face resistance at the $138 level, a move above that would be bullish. If, when, Pepsico moves above the EMA the next targets are the $144 level and then the current all-time high. Based on these results, the dividend, and the outlook I think a retest of the all-time high will come by the end of the year or early in 2021.