PepsiCo earnings preview: Which levers can be pulled to catch up to Coca-Cola?

PepsiCo (NASDAQ:PEP) will report earnings on October 8 in what will be the first major release in the beverage sector for the Q3 earnings season.

By the numbers

Analysts expect the food and beverage giant to disclose revenue of $23.8 billion. Organic sales are expected to be up 3.0% in the quarter to improve from the +1.9% pace seen in Q2. Pricing is seen being up 3.8%, while volume is expected to fall 0.9%. PepsiCo (PEP) is expected to see its operating margin come in at 17.4% of sales and for adjusted EPS to be reported at $2.30. Notably, the last 14 EPS revisions on PepsiCo (PEP) have been to the downward side. Ahead of the report, Bank of America warned that consumption trends and market share loss for PepsiCo (PEP) in key areas could set it up for soft full-year guidance. Morgan Stanley was also cautious on PepsiCo, noting that the company’s market share is deteriorating in U.S. scanner data to products from Coca-Cola (NYSE:KO) and Keurig Dr Pepper (KDP). The firm said none of Pepsi’s (PEP) major product categories are gaining or holding share, and only 14% of mix did in Q2, showing PEP’s recent breadth of share losses is wide. On Seeking Alpha, analyst Vinay Utham noted PEP has a solid track record of beating EPS estimates every quarter. “Despite this positive, when one looks at the company, there are far too many uncertainties today,” he warned.

New strategies and M&A

Some analysts think that if PepsiCo’s (PEP) weakness continues that it will raise the question again about the potential for larger actions including restructuring, portfolio review, and beverage franchising. Investors have seen PepsiCo (PEP) reset its portfolio in the past by actions such as spinning off the fast-food restaurant business (KFC, Pizza Hut and Taco Bell) and divesting Tropicana. There is also the wildcard on what PepsiCo plans to do with its large stake in Celsius Holdings (CELH), which could be addressed on the earnings call. In terms of M&A, PepsiCo (PEP) did make a sizable acquisition in October, with a deal $1.2 billion deal for Mexican-American food brand Siete Foods. PepsiCo (PEP) expects that the acquisition will expand its multicultural portfolio, while also growing its better-for-you food offerings. PepsiCo’s major acquisitions in the near past include picking up SodaStream for $3.2 billion in 2018, Pioneer Foods in South Africa for $1.7 billion in 2019, Rockstar Energy for $3.85 billion in 2020, and BFY Brands for an undisclosed amount in 2020.

C-suite spotlight

PepsiCo (PEP) is on watch to make some changes with management after Target (TGT) nabbed Jim Lee away from the company to be the retailer’s new CFO. BNP Paribas analyst Kevin Grundy emphasized that the news is clearly suboptimal for the food and beverage giant. He noted Lee was beginning to build his profile with investors and was undoubtedly in pole position to replace PEP’s current CFO, Jamie Caulfield, at some point in the future when Caulfield chooses to retire. “Moreover, this comes on the heels of the surprising departure of Hugh Johnston, PEP’s long-time CFO, who left to become Disney’s CFO back in November 2023,” added Grundy. There have also been rumblings with investors about the top spot at the multinational. PepsiCo (PEP) is led by Ramon Laguarta, a 25-year company veteran, who has served as CEO since 2018, and Chairman of the Board since 2019. In terms of its management bench, PepsiCo (PEP) is expected to look for retail tech veterans, with AI, automation, supply chain, and logistics optimization all high priorities.

PepsiCo (PEP) is down 1.3% on a year-to-date basis, which compares poorly to the 19% rally for Coca-Cola (KO) over the same period.