Does PepsiCo Belong in Your Portfolio?

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PepsiCo (NYSE: PEP  ) , the global food and beverage giant behind brands such as Pepsi, Lay's, Gatorade, Quaker Oats, and Tropicana, has watched its stock reach new all-time highs in 2014 and strong earnings have played a primary role in its rise. The company has scheduled its second-quarter earnings announcement for July 23, so let's take a look at its most recent quarterly report and the expectations for the upcoming release to determine whether it's gearing up for another earnings beat and if it represents a great long-term investment opportunity today.

Source: PepsiCo's Facebook

Blowing away the expectations
On April 17, PepsiCo released its first-quarter report and the results surpassed analysts' expectations on both the top and bottom lines; here's a summary:

Metric Reported Expected
Earnings Per Share $0.83 $0.75
Revenue $12.62 billion $12.47 billion

Source: Estimize

Earnings per share increased 7.8% and revenue increased 0.3% year-over-year, driven by a global volume rise of 1%. Here's a breakdown of PepsiCo's revenue and revenue growth by segment:

Segment Revenue Change
PepsiCo America's Beverages $4,426 million 0.1%
Frito-Lay North America $3,219 million 3.1%
Quaker Foods North America $634 million 0%
Latin America Foods $1,338 million (2.1%)
Europe $1,961 million 1%
Asia, Middle East, & Africa $1,045 million (4.6%)
Total $12,623 million 0.3%

Source: PepsiCo

Even with the minuscule revenue growth, PepsiCo's operating profit increased 9% to $1.81 billion and its operating margin expanded 110 basis points to 14.3%, and these strong results came from the 1.5% decrease in cost of sales. The company also noted that it is on track to deliver approximately $1 billion in annual productivity savings in 2014, which will likely result in further expansion of its margins.

Source: PepsiCo

Lastly, PepsiCo's cash flow from operations totaled $181 million in the first-quarter and this, paired with the $9.38 billion in cash and cash equivalents it had to begin the quarter, enabled it to repurchase approximately $1.25 billion worth of its common stock and pay approximately $888 million in dividends. The company stated that it continues to expect to return about $8.7 billion to shareholders through dividends and share repurchases in fiscal 2014, which would be a 35% increase from 2013.

All in all, it was a fantastic quarter for PepsiCo and its stock reacted accordingly by rising 0.92% in the trading session that followed; the shares have continued higher by over 4% in the weeks since and investors are hoping for a similar performance following its second-quarter release.

Expectations & what to watch for
PepsiCo has scheduled its second-quarter report for release before the market opens on July 23 and analysts currently anticipate mixed growth; here's an overview:

Metric Expected Year Ago
Earnings Per Share $1.23 $1.31
Revenue $16.88 billion $16.81 billion

Source: Estimize

These expectations call for earnings per share to decrease 6.1% and revenue to increase 0.4% year-over-year, which would be quite attainable if momentum carries over from the first quarter. Key metrics aside, here's four other things investors will want to watch for:

  1. Third-Quarter Outlook: It will be important for PepsiCo to provide guidance for the third quarter that is within or above analysts' expectations; the consensus estimates currently call for earnings per share of $1.32 and revenue of $17.31 billion, which would result in year-over-year growth of 6.5% and 2.4%, respectively. 
  2. Full-Year Outlook: While providing satisfactory guidance for the third quarter, it will also be important for PepsiCo to reaffirm its full-year outlook; this outlook called for 7% core constant-currency earnings-per-share growth, mid-single digit organic revenue growth, and productivity savings of approximately $1 billion.
  3. Share repurchases: Watch for the amount of shares repurchased during the quarter and make sure PepsiCo is on track to achieve the $5 billion in repurchases it had planned for the year; after the company spent $1.25 billion on repurchases in the first quarter, it is off to a great start, so it would be ideal for it to spend another $1.25 billion on repurchases in the second quarter.
  4. Coca-Cola's release: The world's largest beverage producer is scheduled to release earnings on July 22, the day before PepsiCo, so investors will want to watch closely because it will provide a substantial amount of useful information, such as the condition of the beverage industry and strength of the consumer.

If PepsiCo can deliver on the earnings per share and revenue expectations and satisfy the elements above, and I think it will, the stock will likely respond by pushing to new all-time highs; with this being said, I believe investors should strongly consider initiating long-term positions right now, not for the purpose of trading PepsiCo going into earnings, but because it is undervalued based on forward earnings estimates and has a bountiful 2.9% dividend, which makes for a picturesque buying opportunity. 

Source: Lay's

The Foolish bottom line
PepsiCo is an international powerhouse and its stock has performed accordingly in 2014, setting new all-time highs along the way. The company will announce its second-quarter earnings on July 23 and I think it will surpass analyst expectations for the second consecutive quarter, and I believe this will send its shares even higher. Earnings aside, Foolish investors should consider initiating positions in PepsiCo today to allow price appreciation and its 2.9% dividend to provide significant returns over the long term.

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Joseph Solitro

A fan of innovation, strong fundamentals, and all things baseball. Follow on Twitter @JoeySolitro. Fool on!

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