Can Pepsi (PEP) Beat Q3 Earnings on its Snacks Strength?

PepsiCo, Inc. (PEP) is set to report third-quarter 2014 results on Oct 9, before the market opens. Last quarter, it delivered a positive earnings surprise of 7.32%.

In fact, the food and beverage company has delivered positive earnings surprise in the trailing four quarters. Let’s see how things are shaping up for this announcement.

Factors to Consider this Quarter

Pepsi began the first half of 2014 on a solid note, delivering positive earnings and revenue surprises in both the quarters. Strong pricing, solid global snacks performance, and sales gain in developing/emerging markets, along with cost reductions and productivity gains, aided the upbeat results.

Moreover, at the second-quarter conference call, the food and beverage giant raised its earnings guidance for the year. The upside was based on the company’s strong year-to-date performance and an optimistic market outlook for the rest of the year.

Strong performance by Pepsi’s snacks business has been recompensing its relatively weaker beverage sales. Notably, although carbonated soft drinks (CSD) remained weak, Pepsi’s American beverage business showed sequential improvements in both the quarters backed by better non-carbonated beverage (NCB) volumes.

Pepsi’s carbonated soft drinks (CSD) have been reporting sluggish volumes for the past several quarters due to weak category headwinds. Amid growing health and wellness consciousness, consumers have become particularly wary about the use of artificial sweeteners and high sugar content in soft drinks, and associated obesity concerns. This is affecting CSD sales of Pepsi as well as other soft-drink producers like The Coca-Cola Company (KO) and Dr Pepper Snapple Group. We anticipate the downward trend of CSD sales to continue in this quarter as well.

Moreover, currency headwinds are expected to hurt both third-quarter revenues and earnings by 2%. In addition, interest expenses are anticipated to rise year over year. Also, a ramp up in marketing and advertising is expected in the quarter, which should pressurize profits.

Earnings Whispers?

Our proven model does not conclusively show that Pepsi is likely to beat earnings this quarter. That is because a stock needs to have both a positive Earnings ESP and a Zacks Rank #1, 2 or 3 for this to happen. That is not the case here, as you will see below.

Negative Zacks ESP:  The Earnings ESP is -1.55%.

Zacks Rank: Pepsi’s Zacks Rank #2 (Buy) when combined with negative ESP makes surprise prediction difficult.

We caution against stocks with Zacks Rank #4 and 5 (Sell-rated stocks) going into the earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Other Stocks to Consider

A couple of stocks in the consumer staples sector that have both a positive Earnings ESP and a favorable Zacks Rank are:

The WhiteWave Foods Company (WWAV), with an Earnings ESP of +3.85% and a Zacks Rank #3 (Hold).

Keurig Green Mountain, Inc. (GMCR), with an Earnings ESP of +10.26% and a Zacks Rank #3.
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COCA COLA CO (KO): Free Stock Analysis Report

PEPSICO INC (PEP): Free Stock Analysis Report

KEURIG GREEN MT (GMCR): Free Stock Analysis Report

WHITEWAVE FOODS (WWAV): Free Stock Analysis Report

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Zacks Investment Research

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— Zacks Investment Research

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