PepsiCo Stock (PEP) Underperforming Into Earnings: What To Expect?

PepsiCo's stock (PEP) has offered precious little to holders this year, declining 6.27% YTD, and 0.65% over the past month, as broader markets have rallied. The stock's underperformance raises concerns as the company approaches earnings tomorrow.

Analysts expect PepsiCo to report earnings per share (EPS) of $2.26 for the upcoming quarter, slightly below the $2.31 reported in the same period last year, suggesting a modest year-over-year decline in profitability. However, revenue is projected to rise to $23.84 billion, reflecting a 2.25% increase from the prior year.

This indicates that while sales are growing steadily, higher costs or margin pressures may be weighing on earnings, highlighting a mixed but stable outlook for the company in the current economic environment.

Over the past 12 months, PepsiCo's stock has significantly lagged behind its industry peers. While the Beverages – Soft Drinks industry has seen a modest gain of 1.3%, PEP has experienced a decline of approximately 17.39%. This underperformance has prompted scrutiny of the company's strategic direction and operational efficiency.

Several factors are contributing to the current uncertainty surrounding PepsiCo. In April, the company revised its annual profit forecast, anticipating a 3% decline in core earnings per share. This revision was primarily attributed to rising production costs and the impact of U.S. trade tariffs on key materials like steel and aluminum. CEO Ramon Laguarta has stated that the company is actively working to mitigate these challenges through alternative sourcing strategies.

Another significant headwind is the softening demand for sodas and snacks in the U.S. As consumers become more health-conscious and discretionary spending tightens, PepsiCo has been forced to rely more heavily on promotional activities to maintain sales volume.

This trend is reflected in the performance of its North America beverages unit, which saw a weaker 1% increase in organic revenue in the fourth quarter, a sharp deceleration from the previous year's 7% rise. Similarly, Frito-Lay North America reported a decline in growth.

The recent acquisition of a $4 billion stake in PepsiCo by Elliott Investment Management has added another layer of complexity. Elliott has publicly criticized the company's strategic direction, citing slowing growth and reduced profitability in its North American operations. The firm has outlined a turnaround plan focused on enhancing efficiency, innovation, and value creation.

However, one aspect of Elliott's proposal, namely the spin-off of PepsiCo's bottling operations, has been met with some scepticism. While some believe that this divestiture could unlock significant value, others worry about the potential costs and disruption associated with such a complex transaction.

While the prevailing narrative focuses on PepsiCo's struggles, it's necessary to consider the bull view to complete the picture. The company possesses a portfolio of iconic brands that command significant pricing power. Furthermore, PepsiCo has a proven track record of adapting to changing consumer preferences and market conditions.

The current challenges, while significant, may present an opportunity for the company to reinvent itself and emerge stronger in the long run. The focus on cost-cutting, even if painful in the short term, could lay the groundwork for sustainable, profitable growth going forward.

Moreover, the intense scrutiny from Elliott Management could force the company to make difficult but necessary decisions that it might have otherwise avoided. The market may be underestimating PepsiCo's ability to navigate these challenges and unlock its inherent value.

PepsiCo's upcoming earnings announcement will be a crucial test of the company's ability to address its current challenges and regain market confidence. The company's guidance for the remainder of the year, as well as any updates on its strategic initiatives, will be closely scrutinized.