Earnings Preview: Pepsico (PEP)

Stock Ratings: 1 = buy at current stock prices, 2 = buy on a 5-10% dip in stock price, 3 = sell on a 5-10% increase in stock price, 4 = sell at current stock prices to raise cash.  Ratings are based upon 12-18 month outlook on stock direction and not necessarily related to moves I make due to financial positioning.

In the latest summary, I said the only stock that had earnings announcements that I needed to pay attention to was Alcoa.  This was an inaccurate statement.  Despite all my efforts to find out, it appears that I've missed Pepsico announcing earnings on Thursday.  As such, I want to take a few minutes to lay out what is expected and how my investing plan plays to those expectations.

The earnings announcement for Pepsico has the potential to not only affect its own stock, but also the market broadly.  They are an international food and beverage company and have the potential to help set the pulse of the global economy, which currently appears to be a major concern for large investors.  If there's continued growth being seen internationally or it's not as bad as they might be expecting, at least, it could help break the numerous down days we've seen lately.  However, if the opposite happens, we could see another beating on the major indices.  Analysts are currently expecting $1.29 earnings on $17.2B revenues.  Earnings are expecting very thin growth year over year and a minor decline quarter over quarter whereas revenues are expected to be slightly higher quarterly and yearly.  

Key things to watch for will include forecasts around expenses and current and forecasted implications of currency conversion.  The reason for expense forecasts involve the fact that commodity prices on the goods the company relies on - primarily corn and oil - have dropped dramatically this quarter.  If I recall, orders are usually placed 6 months in advance, so we're not likely to see a lot of gains from those price declines this quarter, but they should have a margin impact in the future.  We should see margin forecasts expanding.  Currency conversion will have an impact on this quarter's numbers.  Personally, I wouldn't be surprised if we saw a three cent negative impact on earnings this quarter due to the increase in the US dollar value.  It's now harder to make money in other countries based on the how those other currencies convert to dollars.  This, too, is likely to have an impact on the forecasts as it's not expected to be just a one quarter event.

Pepsi has been having a good year.  It's beating the S&P 500 and I am currently expecting that to continue this year.  That being said, the stock is just over a buck off of its 52-week high, even despite the pullbacks we've seen in the markets.  I have the stock ranked as a 2, but I don't see a good buy point until $90 or lower.  Watch both what this stock reports and how the markets respond to it.  This has potential to preview the overall theme to this quarter's earnings.