Pepsi Delivers Relatively Strong Q2; RBC Says One Of Top Large-Cap Ideas

PepsiCo (PEP) has positively surprised with its second quarter earning results, delivering a solid revenue beat. Specifically, Q2 Non-GAAP EPS of $1.32 beat Street estimates by $0.07, while revenue of $15.95B beat by $480M despite dropping 3% year-over-year.

Meanwhile organic revenue growth came in at -0.3% Y/Y, versus consensus of -2.8%. Encouragingly, all segments except for Africa, Middle East & South Asia met or beat consensus estimates.

However GAAP EPS of $1.18 missed consensus forecasts by $0.05. The two driving forces behind weakness remain convenience/gas and foodservice, which will likely weigh on results through year-end, says RBC Capital analyst Nik Modi.

“Despite being faced with significant challenges and complexities as a result of the COVID-19 pandemic, our businesses performed relatively well during the quarter, with a notable level of resiliency in our global snacks and foods business” commented PepsiCo CEO Ramon Laguarta.

“Encouragingly, as restrictions and closures eased and population mobility improved as the quarter progressed, we also saw an improvement in our business performance and channel mix dynamics” he added.

Given the volatile environment and uncertainty surrounding Covid-19, the company is not providing a fiscal year 2020 financial outlook at this time. However, according to Laguarta, Pepsi has ample liquidity and flexibility to meet the needs of its business and return cash to shareholders.

“PEP delivered relatively strong results against subdued expectations” RBC’s Modi summed up post-print. Looking out to the remainder of the year, he is expecting results to be choppy as emerging markets slow and rising COVID-19 case counts pauses and/or reverses re-opening plans in the US.

“For now, we believe investors should be focused on whether or not schools will reopen this fall as that will largely influence consumer purchase behavior” the analyst wrote. Nonetheless, he reiterated PEP as one of his top large cap ideas with a $153 price target (13% upside potential).

Shares in PEP are down 1.3% year-to-date, staying flat on the earnings release. Overall analysts are almost equally split between Hold and Buy ratings, giving the stock a Moderate Buy consensus. Meanwhile the average analyst price target of $144 indicates 6% upside potential lies ahead. (See Pepsi stock analysis on TipRanks).

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