Will Global Macro Headwinds Overshadow North American Strength?
Author: Ryan Kilgallen, Published: July 6, 2016 at 1:15pm, Category: Earnings Preview
PepsiCo Inc (NYSE:PEP) will report second quarter results on Thursday. Investors will be watching for signs of continued momentum from health and wellness products, which drove a 1.5% increase in net sales for the North American Beverage division last quarter. On the first quarter earnings call Chairman and CEO Indra Nooyi highlighted the success of the everyday nutrition line: “The growth of our everyday nutrition products, which accounts for a quarter of our global net revenue, is outpacing the growth of the balance of the portfolio.”
Despite the strong domestic trends, the continued weakness in global macroeconomic conditions, and the impact on currency translation remains a focus for analysts. On Thursday’s earnings call management will likely give some early indications of the expected impact from Britain’s planned exit from the European Union, as the U.K. is PepsiCo’s fifth largest market.
Despite the strong domestic trends, the continued weakness in global macroeconomic conditions, and the impact on currency translation remains a focus for analysts. On Thursday’s earnings call management will likely give some early indications of the expected impact from Britain’s planned exit from the European Union, as the U.K. is PepsiCo’s fifth largest market.
Latest Management Guidance for 2016:
Source: Management’s guidance from the first quarter earnings call.
- Approximately 4% organic revenue growth (excluding the impact of the 53rd week).
- Contribution of 1% to net revenue growth due to the extra week included in 2016.
- Negative foreign exchange impact of 4% on net revenue.
- Core earnings per share of $4.66.
- Low-single-digit raw material deflation (excluding the impact of transaction-related foreign exchange.
- Productivity savings of approximately $1B.
- Lower corporate unallocated expenses due to lower pension expense.
- Higher net interest expense due to higher balance of debt.
- A core effective tax rate in line with the full year 2015 rate.
- More than $10B in cash flow from operations, and $7B in free cash flow.
- Net Capex of approximately $3B
- Dividends of $4B and share repurchases of approximately $3B.
Source: Management’s guidance from the first quarter earnings call.
Earnings Model Assumptions:
Our PepsiCo model uses revenue growth rates and operating margin by segment to project future earnings. We have taken management’s guidance (above) into consideration throughout our model. We have made the following assumptions in our PepsiCo earnings model:
Revenue: We kept the growth rates for the North America businesses and Latin America relatively constant with historic results. We applied a revenue growth rate of -12% for the European segment, which represents a sequential decline of 3 percentage points, to reflect the difficult economic backdrop in the region. Based on these assumptions our estimate for total revenue is in line with the consensus at approximately $15.4B for the second quarter.
Operating Margins: For Latin America we applied an operating margin of 17%, well ahead of the 14% margin reached in the second quarter of last year, which reflects continued momentum from the strong results in the first quarter. For Europe we applied a 1% contraction in operating margin from the second quarter of last year. We held the operating margins for the remaining segments approximately in line with historic results.
EPS: Given the above assumptions, management’s effective tax rate estimate, and the guidance for the reduction in corporate and unallocated expenses, we were able to get back to the consensus EPS estimates of $1.29 and $4.74 for the second quarter and full year 2016 respectively.
Our PepsiCo model uses revenue growth rates and operating margin by segment to project future earnings. We have taken management’s guidance (above) into consideration throughout our model. We have made the following assumptions in our PepsiCo earnings model:
Revenue: We kept the growth rates for the North America businesses and Latin America relatively constant with historic results. We applied a revenue growth rate of -12% for the European segment, which represents a sequential decline of 3 percentage points, to reflect the difficult economic backdrop in the region. Based on these assumptions our estimate for total revenue is in line with the consensus at approximately $15.4B for the second quarter.
Operating Margins: For Latin America we applied an operating margin of 17%, well ahead of the 14% margin reached in the second quarter of last year, which reflects continued momentum from the strong results in the first quarter. For Europe we applied a 1% contraction in operating margin from the second quarter of last year. We held the operating margins for the remaining segments approximately in line with historic results.
EPS: Given the above assumptions, management’s effective tax rate estimate, and the guidance for the reduction in corporate and unallocated expenses, we were able to get back to the consensus EPS estimates of $1.29 and $4.74 for the second quarter and full year 2016 respectively.
The author of this article has no financial investment or other conflict of interest related to the subject company or other companies discussed. Any views made or implied in this article represent the author’s opinions. Click here to visit Ryan's contributor page.
