- Wall Street average estimates for PepsiCo come in at $1.06 per share for Q4 2015.
- Look for PepsiCo to discuss a possible future with less and less carbonated soda in its product mix.
- PepsiCo remains committed to growing free cash flow and dividends.
On 11th Feb 2016, beverage and snack conglomerate PepsiCo (NYSE: PEP) will report its Q4 FY 2015 earnings. The average EPS estimate for the company comes in at $1.06. This would represent a 5% YoY decline if the company meets these estimates. Global volatility in certain parts of the world could derail Pepsi from meeting its goal. Investors should look for the following items when PepsiCo reports earnings next week.
Investors should look for PepsiCo’s management to provide insight on its product strategy. PepsiCo’s management isn’t afraid to tout its competitive advantage of having a diverse product portfolio. By contrast, its closest rival Coca Cola (NYSE:KO) only sells beverages. PepsiCo has proven quite strategic at producing and marketing various types of products to the public. PepsiCo strives to understand consumer behavior through the use of technology.
Moreover, PepsiCo understands that the demand for carbonated soda will be strained, if not declining, for the foreseeable future. In an interesting demonstration of PepsiCo management’s attitude towards adaptability, CEO Indra Nooyi had this to say, “I think focusing just on CSDs [carbonated soft drinks] is actually a thing of the past and I would strongly suggest everybody look at total LRB [liquid refreshment beverages], because that's the right way to look at the market going forward.” In other words, PepsiCo sells more than just Pepsi Cola. PepsiCo believes the future of its beverage business lies more in “non-carbs”.
Like its rival Coca-Cola, PepsiCo wants to cut costs and make good use of every dollar it spends. Any success PepsiCo recognizes in 2016 will stem in part from these efforts. PepsiCo continues to expand automation throughout its distribution system. For example, the company increased automation in the area of packaging, palletizing and warehouse functions. PepsiCo remains focused on reducing redundant truck routes within its logistics system.
Higher interest costs
PepsiCo’s management anticipates interest expense to increase in Q4 2015 due to higher long-term debt and higher interest rates. PepsiCo’s long-term debt increased 11% since the end of last year. PepsiCo reported Q3 2015 operating income comes in at nine times interest cost versus 12 the same time last year. In the next quarter, as well as over the long-term, investors should keep an eye on PepsiCo’s debt levels and interest coverage.
Focus on free cash flow
PepsiCo understands that its long-term shareholders are co-owners of the business and that business owners want their enterprises to generate cash. As of Q3 2015, PepsiCo expanded its year-to-date free cash flow 3% YoY. Productivity gains and lower capital expenditures contributed to free cash flow growth. PepsiCo has also raised its dividend for 43 consecutive years, and it shouldn’t have any difficulty in increasing its dividend again this year. PepsiCo pays out 56% of its free cash flow, which isn’t bad for a large company. Shareholders currently receive $2.81 per share per year, which yields 2.8% annually.
If PepsiCo doesn’t meet earnings estimates it would be because of extraordinary events, such as the deconsolidation of PepsiCo’s Venezuelan business, which suffers from a range of political issues in the local economy there. PepsiCo remains a viable long-term business with a diverse product portfolio and demonstrates the willingness and capability to adapt to changing times. Pepsi stock definitely warrants a second look.