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PepsiCo (NYSE: PEP), which competes with Coca-Cola (NYSE: KO) for worldwide supremacy of carbonated sugar water, is set to report earnings for the third quarter on Tuesday, October 14. What kind of growth are we looking at?
Well, according to Earnings.com, we're looking at roughly 10% appreciation for the bottom line. That is, of course, if analyst expectations are met. The call is for $1.08 per share. While 10% isn't stunning growth in some respects, it's a solid amount for a mature consumer company such as PepsiCo, and it's going to look attractive to investors searching for safe havens in the economic tempest. That's a given. However, with a beverage company, earnings aren't the only thing that matters, that I can promise you. More telling will be the case-volume metric. Wall Street always studies case-volume growth, and if that is weak, then the stock could see some pressure. I own shares of Coke, and I can tell you that I follow case volume closely. With a global slowdown going on, I'd have to imagine that PepsiCo's case-volume performance won't be the best it's ever reported. The other thing I follow with Coke is the cash-flow characteristics. Investors will want to see how free cash flow is faring with PepsiCo. A strong cash-flow statement would also be indicative of how resilient PepsiCo's stock might be over the coming months. If a lot of cash is coming in, then management will have more flexibility with share buybacks, although I'm sure managements everywhere are becoming conservative on that count, for obvious reasons.
I expect to see weakness in North America for carbonated sodas, a situation which seems to be par for the course for both PepsiCo and Coke. I've said this many times before, but I'll say it yet again: marketing strategies have to be reviewed and improved to get the flagship soda brands moving again. It's great that waters such as Aquafina are doing well, but management can't forget the importance of the iconic blue can. What's great about PepsiCo is that it also has the Frito-Lay brand to fall back on. I'll be interested to see how the numbers for that operation fare. I'll bet that they're doing relatively well. Who can live without Doritos, right?
As I write this, PepsiCo's stock is up about 4%. It's difficult to say to buy the stock ahead of the earnings with today's rally not only in the stock, but in the market at large. We could just as easily sell off tomorrow, and from a trading perspective, selling into strength would be the primary instinct at this point. PepsiCo looks like it'll probably beat by a penny tomorrow, if recent past history is any sort of guide. That should please long-term investors, but traders may not look at such performance as a reason to bring the stock up much higher from here. It'll be fun to see what actually happens.
Disclosure: I own Coke; positions can change at any time.
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