Global snack and beverage manufacturer and seller PepsiCo (PEP 0.05%) is expected to report fiscal 2022 first-quarter earnings on April 26. The company is grappling with rising costs across the business. Nevertheless, PepsiCo management is confident in the company's performance enough to plan a dividend increase in June, which would qualify it as a Dividend King.
All indications are that PepsiCo is still delivering revenue growth as consumers crave the company's diverse portfolio of snacks and beverages. We should get some confirmation of that when it reports Q1 earnings on Tuesday. Here's what to expect.
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Sales are not rising fast enough to keep up with costs
Inflation has started taking a bite out of PepsiCo's profits. In its most recent quarter, which ended Dec. 31, operating profit fell from $2.83 billion in the same period the year before to $2.56 billion -- despite revenue increasing from $22.5 billion to $25.2 billion during the same time. Rising prices for commodities, transportation, and labor can be attributed to the falling profits, which are expected to persist in 2022.
PEP Operating Income (Quarterly) data by YCharts.
The coronavirus pandemic is causing widespread shortages of materials and labor worldwide. Meanwhile, consumer demand has remained robust, especially in the U.S., amid fiscal and monetary stimulus. The combination of decreasing supply and rising demand is causing prices to go up. Those costs are hitting businesses and households alike, as evidenced by PepsiCo's falling profits.
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Key Data Points
To address these pressures, management has implemented price increases and is confident it has the pricing power to pass along the higher costs to consumers. For 2022, it has forecasted organic revenue growth of 6% and earnings-per-share (EPS) growth of 8%. It remains to be seen whether PepsiCo's customers accept the price increases without decreasing spending.
Thankfully, consumers are in a relatively good financial position after several rounds of fiscal stimulus in the United States. Unemployment remains low, and employers are offering increasing wages to attract workers to their firms. A healthy macroeconomic environment is an excellent backdrop to implementing price increases.
What this could mean for PepsiCo investors
Analysts on Wall Street expect it to report revenue of $15.5 billion and EPS of $1.23 in Q1. If the company meets those projections, it will represent a revenue increase of 6.8% and an EPS boost of 1.65% from the same period the year before. The meager earnings growth could cause concern for PepsiCo's management, which had forecast an 8% increase in EPS for all of 2022.
PEP data by YCharts.
If earnings continue to weaken, it may warrant management decreasing the annual EPS target, which would likely be a significant blow to the stock. Already, PepsiCo stock is underperforming rival Coca-Cola, which is hitting record highs in 2022. PepsiCo thrived during the stay-at-home phases of the pandemic as its robust snack segment generated increased sales and profits.
Now that economies are reopening, folks are snacking less at home, and it could continue to hurt the company's profitable segment. Slowing sales and rising costs make for a poor combination, and investors should be cautious with PepsiCo's stock in the near term.
