What To Expect From PepsiCo’s Q1 2019 Results?

by Trefis Team
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PepsiCo Inc. (NYSE: PEP) is set to announce its Q1 2019 results on April 17, 2019, followed by a conference call with analysts. The company is expected to report revenues of $12.7 billion in Q1 2019, marking a growth of 1.3% on a year-on-year basis. Revenue growth is likely to be driven by increased sales across all its operating segments, especially with higher growth in emerging markets. Increased demand for health snacks, sports drinks, and non-carbonated drinks (NCDs) is expected to lead to healthy growth in the company’s healthy snacks and beverages portfolio. Revenue would be significantly lower compared to Q4 2018, mainly due to seasonality, with the fourth quarter being the best performing quarter for the company. Market expectations are for the company to report earnings of $0.92 per share in Q1, slightly lower than $0.96 per share in the previous year period. Lower earnings would likely be a reflection of a higher effective tax rate, incremental investments to strengthen its business, partially offset by cost savings due to refranchising of the bottling business.

We have summarized our key expectations from the announcement in our interactive dashboard – How is PepsiCo expected to fare in Q1 2019 and what is the full year outlook? In addition, here is more Consumer Staples data.

Key Factors Affecting Earnings

Frito-Lay North America

  • Frito-Lay North America (FLNA), which contributes a little over a quarter of the company’s total revenue, is expected increase its sales by 1.6% (y-o-y) in Q1.
  • Higher revenue would primarily be driven by effective net pricing and volume growth in variety packs and its trademark Doritos.
  • However, we expect margins to continue to decline and remain subdued in the near future, driven by higher transportation costs and commodity prices, especially potatoes and motor fuel.

Quaker Foods North America

  • Net revenue of Quaker Foods has been declining over the last three years, reflecting lower volume and unfavorable net pricing and mix. The lower volume was driven by decline in trademark Gamesa and ready-to-eat cereals, partially offset by the growth in oatmeal.
  • We expect segment revenue to marginally increase in Q1 2019, compared to the previous year period, with the oats market projected to grow at a CAGR of 5.5% over the next 10 years, partially offset by a slowdown in ready-to-eat cereals.
  • Operating margins are expected to remain lower due to high commodity prices, partially offset by productivity savings.

North America Beverages

  • We expect revenue to grow by 0.8% in Q1, driven by healthy growth in the segment’s juice and sports drinks portfolio, partially offset by lower sales of carbonated soft drinks.
  • We expect operating margins to improve, driven by cost savings under its new productivity plan. However, they are unlikely to touch historical highs due to rising advertising and marketing expenditure.

Growth in Latin America

  • Net revenue is expected to increase by over 2% in Q1 in the absence of major foreign currency headwinds (with the dollar relatively stable) and the company’s campaign focus on healthy snacks and NCDs.
  • In spite of low revenue, operating margins were high in Q1 2018 mainly due to one-time insurance settlement recoveries related to the 2017 earthquake in Mexico. We expect margins to decline in the absence of any non-recurring benefit unlike last year, and higher spending on advertising.

Europe, Sub-Saharan Africa (ESSA) and Asia, Middle East and North Africa (AMENA)

  • Though the ESSA segment saw impressive growth through 2018, we expect revenue growth to be muted at 1.9% in Q1 2019, driven by the effects of refranchising of all its beverage bottling and snacks distribution operations at Czech Republic, Hungary, and Slovakia (CHS) in 2018.
  • Revenue in the AMENA segment is projected to increase by 1.3% in Q1 driven by projected double-digit growth in snacks volume in India, China, and Pakistan, along with increasing sales of NCDs (non-carbonated drinks) in the region, partially offset by loss of volumes due to refranchising a portion of the beverage businesses in Thailand.
  • We expect both the segments to continue growing their operating profit margin, benefiting from productivity gains and cost savings due to refranchising of their high-cost bottling business.

Lower Profitability

  • We expect net income margin to decline to 10% in Q1 2019, which is a sharp drop from 35.1% in Q4 2018 and slightly lower than 10.7% in Q1 2018.
  • The primary factor driving margins lower would be the effective tax rate, which is expected to be 21% throughout 2019, compared to -254.9% in Q4 2018.
  • The one-time tax benefit in Q4 related to net tax benefits resulting from the reorganization of PEP’s international operations and the implementation of TCJ Act.

Full-year picture

  • For the full year, we expect the company’s revenues to grow by 3.1% to $66.7 billion in 2019, driven by growth in the company’s healthy snacks, sports drinks, and non-carbonated beverage portfolio.
  • An effective tax rate of 21% in 2019 (compared to tax benefits received in 2018) and incremental investments by the company to strengthen its business is expected to lead to a sharp drop in net income margin to 8.5% in 2019 from 19.4% in 2018. However, gains from the company’s recently announced new productivity plan are expected to support margin growth going forward.

Trefis has a price estimate of $119 per share for PepsiCo’s stock.


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