PepsiCo Can Soar To New Highs In The 2nd Half

Key Points

• PepsiCo outperformed on the top and bottom lines in Q2, guiding the market higher. 
• The company displayed clear strength and pricing power despite shifting consumer trends. 
• Analysts support the stock and could drive it to a new all-time high this quarter. 

PepsiCo NASDAQ: PEP has been leading the beverage and consumer staples market for years, and the company is unlikely to lose its position. The Q2 results prove the pep+ strategy is working and driving value for investors. Key takeaways from the report include strength in all segments, margin improvement, above-consensus performance, and an increase in guidance. Taken together, the news should be enough to get the analysts to up their targets which already have the stock on the verge of a new high. 

PepsiCo Beats And Raises: Shares Move Higher 

PepsiCo was expected to produce a solid quarter, but the metrics outperformed on every level. The company reported $22.32 billion in net revenue for a gain of 10.3% compared to last year, which beat consensus by 270 basis points. The strength is driven by growth in all segments and offset by a 2.5% FX headwind. On an organic basis, sales are up 13% YOY and momentum is expected to continue into the end of the year. 

Quaker Foods was the weak spot in the report, with a growth of only 2%, but that was more than bolstered by a 19% increase in Europe, 18% in emerging markets, 14% in Frito Lay, and 13% in the core PepsiCo brand. The only bad news is that volume is down 3% for food and 1% for beverages, but this small amount of elasticity is more telling in that it reveals pricing power in the face of shifting consumer habits. 

The margin news is also good. The company widened the margin at the gross and operating levels by a significant amount to drive substantial increases in GAAP and adjusted earnings. The operating margin widened by 625 bps to drive a 93% increase in GAAP EPS. Non-comparable items aside, the adjusted EPS came in at $2.09, up 15% compared to the top-line 10.3%, and it outpaced the consensus by $0.13 or 660 basis points. 

Guidance is another strong point in the results and the factor that, more than any other, will lift the stock during the 2nd half of the year. The company raised guidance for revenue and earnings to a range that outpaces the consensus and assumes additional strength this year.

The guidance for organic revenue growth was increased by 2% at both ends of the range, while the EPS target was increased by $0.20 to $7.47 compared to the Marketbeat.com consensus of $7.32. This will lead to some EPS revisions, if not price target increases or rating changes.  The analysts have the stock pegged at Hold despite persistent outperformance and margin strength. 

PepsiCo Capital Returns Will Grow 

PepsiCo has a robust cash flow and returns ample capital to its shareholders. The dividend isn’t the highest in the sector at 2.75%, but it is a reliable payout from a Dividend King. The $5.06 annualized payout is about 67% of the EPS guidance, which is on the high side but not a problem for a company such as PepsiCo.

The company has a clear line of sight to its earnings power and a relatively unencumbered balance sheet. The Coca-Cola Company NYSE: KO pays similar earnings and is in good shape to continue annual distribution increases. PepsiCo also repurchases shares; repurchased topped $0.45 billion for the quarter or about 0.17% of the pre-release market cap. 

Shares of PepsiCo surged 2.5% on the guidance raise and are confirming support at the up-trend line. The up-trend line is consistent with the short-term moving average and provides solid support for the market. Assuming the market follows through on this signal, PEP stock price should trend higher and retest the all-time high soon.

That is the critical level; if the market can rise above $197, it should trend higher until the next earnings report.