PepsiCo, Inc. (PEP) Could Have a Difficult 2019

In former CEO Indra Nooyi’s final quarter with the company, PepsiCo, Inc. (Nasdaq: PEP) exceeded earnings expectations and reported a return to organic revenue growth in its North American beverage business. However, PEP stock dropped following the report on concerns over the company’s shrinking margins, and analysts are concerned that new CEO Ramon Laguarta could see 2019 as a reset year for PepsiCo.

On Tuesday, PepsiCo reported third-quarter adjusted earnings per share of $1.59 on revenue of $16.49 billion. Both numbers topped consensus analyst estimates of $1.57 and $16.36 billion, respectively.

[See: 9 Stocks with Decades of Dividend Growth.]

North American beverage organic revenue, which has been a weakness for PepsiCo in recent quarters, was up 2.5 percent, the company’s first positive number in the past four quarters.

While the top- and bottom-line numbers were solid, gross margins once again contracted by 0.3 percent. Core gross margin contracted by 0.1 percent, operating margin contracted by 0.75 percent and core operating margin contracted by 0.25 percent.

Macquarie Research analyst Caroline Levy says PepsiCo’s organic revenue growth was a positive in the second quarter, but that revenue growth continues to come at the expense of margins. In addition, she says PepsiCo investors will likely be in the dark about Laguarta’s strategy until the Consumer Analyst Group of New York Conference in February.

In the meantime, Levy says PepsiCo is still dealing with a difficult global beverage market and intense competition from the Coca-Cola Co. ( KO). In addition, Laguarta faces tough questions such as whether or not PepsiCo should restructure parts of its business or continue to own its North American bottling operations.

“Uncertainty around the outlook may keep the stock range-bound,” Levy says.

Bank of America analyst Bryan Spillane isn’t concerned about margins or the leadership change at PepsiCo.

[See: 52 Dividend Stocks Boasting 25-Year Dividend Growth.]

“The key debate on the stock from here will likely be whether the new CEO will re-base in FY19 or change growth targets,” Spillane says. “Our view is that current valuation is not pricing in a turnaround and that PEP will respond positively to a concerted effort to re-accelerate growth in the core business.”

Macquarie has a “neutral” rating and $107 price target for PesiCo. Bank of America has a “buy” rating and $125 target for PEP stock.

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PepsiCo, Inc. (PEP) Could Have a Difficult 2019 originally appeared on usnews.com



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