Why PepsiCo May Be a Harbinger for Q2 Earnings Season?

Guidance more than results may steer PEP stock and the broader market 

As part of the highly anticipated start to earnings season, PepsiCo (NASDAQ: PEP) will be one of the first of the “big names” to report earnings. The company will deliver its second-quarter earnings report before the market opens on July 12. Analysts tracked by MarketBeat expect earnings per share of $1.72 on revenue of approximately $19.5 billion.  

However, this earnings season will be less about if a company beats or misses and more about their guidance for the rest of 2022. In that context, PepsiCo’s guidance will likely be a harbinger for investors who are looking for any sign of a market turnaround. 

I won’t insult you with hyperbole to say this is the most important earnings season ever. It does, however, carry some outsized significance. That’s because many analysts are warning of an “earnings recession” that will start in the quarter just ended. If that’s the case, then a company like PepsiCo will have a lot to say about the state of the American consumer.  

Is the Pandemic Rally Coming to an End?  

PepsiCo isn’t exclusively a beverage company. They’ve become a snacking giant. That has positioned the company as a defensive stock. This was on full display during the pandemic. Consumers took to stocking their pantries, which took some of the sting out of the contraction in the restaurant and entertainment venues.  

That trend carried over into 2021. The company has had at least six consecutive quarters where their earnings per share (EPS) and revenue have been higher on a year-over-year (YOY) basis. Not surprisingly, PEP stock is up 64% since the beginning of the pandemic.  

But the growth is slowing. If investors look at the company’s results for all of 2021 compared to all of 2020, they would be happy with an approximate gain of 13% in both EPS and revenue. That being said, PepsiCo growth is slowing in the “what have you done for me lately” category.  

Assuming the analysts’ expectations are correct, PepsiCo will have a trailing twelve-month earnings growth of 4%. And when you compare the first two quarters of 2022 to the same two quarters in 2021, the growth will only be around 2%. 

Will Pepsi’s Guidance Sizzle or Fizzle? 

In its last earnings report, PepsiCo guided for organic growth in sales of approximately 8%. Investors will be observing closely to see if the company maintains this guidance. We offer an opinion that the company may be lowering its guidance by a percentage point or two. 

On the company’s last earnings call, PepsiCo CEO Ramon L. Laguarta offered this assessment of the consumer mood:  

“...we think the consumer is very early in this process of adjusting to the new inflationary environment. I think there's going to be more consumer new behaviors adapting to the new realities...Consumers will stop doing certain things they were doing, going out more, maybe traveling and so on. So we think we're early in the process. I think our categories do normally quite well in inflationary [environments].” 

We agree PepsiCo does have pricing power. Still, with the CPI coming out this week likely to show that inflationary pressures are not abating, the company is likely to report continued pressure on its margins. Therefore, it will not be surprising if the company lowers that 8% by a percentage point or two. If so, that will confirm what many analysts and investors expect, the weak guidance for earnings will cut across all sectors, even defensive stalwarts like PepsiCo.  

Growth is Still Growth 

In stating a belief that PepsiCo is likely to lower its guidance, I don’t want to give the wrong impression. PEP stock is only down 1.5% in 2022 the day before earnings and it’s up about 3% in the last 30 days. In the current market, that’s nothing to be upset about.  

And that doesn’t include the company’s dividend which pays out $4.60 on an annual basis and currently has a dividend yield of 2.69%. Not to mention that the company has increased is a dividend king has increased its dividend in each of the last 51 years. That can go a long way to protecting an investor’s total return.