PepsiCo (PEP 0.80%) shareholders have been winners in recent months. The snack and beverage stock is trouncing the market over the past year despite fears of inflation and slowing economic growth. Pepsi has returned 20% in that time compared to an 8% increase in the S&P 500.
That overperformance is due to expectations that the company will see strong growth in 2022 and won't struggle to pass along higher prices to fans of brands like Doritos and Quaker Oats. It's also thanks to PepsiCo's rock-solid business and its ability to send a growing stream of cash back to shareholders through dividends and stock buybacks.
That bullish thesis will be tested with the company's upcoming earnings report, though, which might include slowing growth and reduced profitability. Let's look at a few metrics Wall Street will be watching in that announcement, set for Tuesday, April 26.
Image source: Getty Images.
Sales volumes
There's little doubt that PepsiCo will report solid sales gains this week. Revenue in 2021 expanded at a blistering 10% rate, after all, and further rebounds are likely this year thanks to robust demand for sodas and snacks. Most investors who follow the stock expect Pepsi to report 7% higher sales on Tuesday as revenue hits $15.5 billion.
There's a lot of noise in that figure, though, including currency exchange swings. That's why shareholders should follow organic sales, which should be solidly positive. Ideally, the company will achieve a balance between rising prices and higher sales volumes. If instead Pepsi reports flat or declining volumes in the context of higher prices, then the business might be struggling to pass along its increasing costs.
Operating margin
Speaking of costs, it's unclear today whether Pepsi's earnings will take a hit from accelerating inflation. CEO Ramon Laguarta said back in February that the company had no trouble navigating "a complex and dynamic cost environment." That complexity became worse in early 2022, though, because of new supply chain stresses, soaring costs on inputs and transportation, and geopolitical strife.
PEP Operating Margin (TTM) data by YCharts
Keep an eye on operating margin as an indicator for Pepsi's ability to sail through these challenges. That figure has been trending lower over the last few years, mainly because the company ramped up investments into its manufacturing and supply chains. Investors are hoping to see it stabilize in 2022 and begin marching back up toward 20% of sales over the next several quarters.
Looking ahead
Pepsi might adjust its 2022 outlook to reflect the latest demand and cost trends. Heading into the report, that forecast calls for organic sales to rise about 6%. Sure, that figure would represent a slowdown compared to last year's 9.5% spike. But Pepsi had been growing at about 4% before the pandemic struck, and so it is still on a much faster growth path.
Laguarta and his team had been predicting a slight increase in profitability this year, and that forecast might also shift on Tuesday. If consumers are still eagerly buying premium products in the snack and beverage niches, then Pepsi will likely expand core earnings by at least 8% in 2022. A softening selling environment, on the other hand, might reduce that pace slightly.
In any case, investors can expect to see higher cash returns from dividend and buyback spending. That cash is one more reason to like PepsiCo's stock as a great way to gain exposure to a steadily growing dividend payer with a bright long-term earnings outlook.
