Considering the increased talk over the past several months of economic slowdowns, inflationary headwinds, and worries about a full-blown recession, it's encouraging that international snack and beverage manufacturer PepsiCo (PEP -0.62%) has managed relatively well in 2022. Interested investors are looking forward to getting an updated status report when PepsiCo releases its fiscal 2022 second-quarter earnings report before the markets open on Tuesday, July 12.
PepsiCo has so far managed to sustain profitability amid rising labor, transportation, and raw materials costs. But with inflation rates rising so quickly in the past several months, investors will need to pay attention to whether PepsiCo can keep managing rising costs in the near term to maintain its bottom line.
PepsiCo is effectively grappling with inflation
Organic revenue growth jumped by 9.3% year over year for PepsiCo in its fiscal first quarter (which ended March 19). The better-than-expected first-quarter results led management to raise the revenue forecast for the rest of the year. PepsiCo now expects revenue growth of 8% for the year. That was up by two percentage points from the previously forecast 6% growth for fiscal 2022.
PEP Revenue (Quarterly YoY Growth) data by YCharts
Despite the upgrade in expectations for revenue, management did not increase earnings estimates. The coronavirus pandemic continues to snarl supply chains worldwide. That's having the effect of raising production costs on everything from wages to materials to fuel. While the company has not been immune to rising costs, it has done a masterful job in mitigating their impact.
PepsiCo has limited the hit to profit margins from increasing costs through a combination of cost management, price increases, and packing mix. That's impressive considering the speed at which prices are rising. According to the Bureau of Labor Statistics in the U.S., the consumer price index rose by 8.6% year over year in May. Amid that pressure, PepsiCo's core gross profit margin increased by five basis points from the same quarter in the previous year.
U.S. Consumer Price Index YoY data by YCharts
What this could mean for PepsiCo investors
Analysts on Wall Street expect PepsiCo to report Q2 revenue of $19.49 billion and earnings per share (EPS) of $1.74. If the company meets those projections, that will represent increases of 1.4% and 1.16%, respectively, from the same period a year before.
PepsiCo's stock has fared relatively well in 2022, falling just 4% as the broader markets are in bear market territory. The catalyst that could lift the stock would be management telling investors that inflationary pressure has leveled off or is falling meaningfully. That would assuage investor concerns that PepsiCo's profits are at risk. We will know more when the report drops on July 12.
