PepsiCo Earnings Call: Stock Climbs As Drinks Company Reports Solid Earnings Beat

Key takeaways

• PepsiCo posted better-than-expected earnings and revenue for its fiscal third quarter
• The report helped to allay fears of weight loss drugs impacting the convenience snacks and drinks market
• PepsiCo shares were up 2% at the earnings report

Drinks and snacks titan PepsiCo, which is home to the likes of Pepsi, Quaker Oats and Mountain Dew, among others, beat expectations on revenue and earnings and has raised part of its full-year guidance.

After a rough few days as the drinks and snacks industry battled share price falls after a leading shopping company made some pointed comments about weight loss drugs, an upbeat earnings report was just what investors were looking for from PepsiCo.

As always, the devil is in the detail with these earnings reports – and while PepsiCo saw revenue increase, there was a drop in volume at the same time. Let’s take a look at the full earnings report, Wall Street’s reaction to the beat and why weight loss drugs are even in the picture right now.

What did Pepsi’s earnings report look like?

It was a decent quarter for popular drinks and snacks provider PepsiCo, with its latest earnings report sending the stock price rising. The company recorded third-quarter earnings of $2.24 a share, up from $1.97 at the same time last year and beating Wall Street’s expectations of $2.15 a share.

Revenue also surprised on the upside, coming in at $23.45 billion from $21.97 billion the same time a year ago. Analysts had forecast $23.41 billion in revenue for the third quarter. Organic revenue climbed by 8.8% compared to last year, while higher prices helped to boost revenue by another 11%.

PepsiCo has also upgraded its full-year earnings forecast, anticipating annual core earnings per share to rise by 13% to hit $7.54. The previous prediction was 12% growth to reach $7.47 on earnings. The company also reiterated its full-year guidance for a 10% rise in organic revenue.

The drinks and snacks giant also expects its fiscal 2024 results to arrive at the upper end of its long-term outlook, which was set at the start of the fiscal year at organic sales growing by between 4% and 6% and adjusted earnings climbing by a single-digit percentage.

“We are pleased with our performance as our businesses and associates displayed tremendous agility and resilience across geographies and categories in an evolving and dynamic environment,” PepsiCo CEO Ramon Laguarta said in a statement.

How did PepsiCo’s products perform?

The price increases may have done the trick with revenue, but PepsiCo saw organic sales volume drop by 2.5% during the quarter. North American drinks and Latin American convenience foods both fell, with the former dropping by 6%. In a bid to drive transactions, Pepsi has been focused on smaller packaging and value packs.

Gatorade was an unexpected bright spot in the report, reporting double-digit growth for the quarter. PepsiCo also plans to relaunch the Mountain Dew Baja Blast flavor that’s exclusive to Taco Bell restaurants.

The North American food division was a better performer than drinks, with Quaker Foods seeing a 1% growth in volume and gaining market share in categories like pancake mix and syrup. Frito-Lay’s growth was flat in comparison.

What about weight loss drugs?

Wait, what about them? Well, there are concerns among investors that the rise of semaglutide drugs like Ozempic and Wegovy could permanently alter the average consumer’s shopping habits.

Walmart hasn’t exactly helped things, with the shopping giant’s CEO saying the new class of weight loss products was causing a drop in grocery shopping, with consumers specifically cutting back on higher-calorie foods. These comments made PepsiCo’s share price drop by 4.8% and Coca-Cola’s slide by 5.2%.

The concerns have even caused Pepsi’s stock price to fall 9.8% in the last month alone. That’s a relatively large overreaction, given that injectable weight loss drugs are still limited in use – only 1.7% of the U.S. population has been prescribed a semaglutide drug this year.

But that’s still a 40-fold increase in five years, and things could change if effective semaglutide oral tablets come to the market. Morgan Stanley analysts predict that the pool of patients on weight loss drugs will climb to 7% of the U.S. population, or 24 million people, in the next decade.

PepsiCo went some way to address the concerns in the latest earnings release with a statement on how the company continued to invest in portion-control packaging, low or no-saturated fat content and zero-sugar drinks.

During the analyst call, Laguarta said the company had seen a “negligible” impact on its business so far and that “We’re observing the growth of these new drugs and its potential impact.” That sounds pretty confident to us – for now.

What was the stock market reaction?

Wall Street was relieved to see the impact of the weight loss drugs market wasn’t felt yet by Pepsi, with shares rising by 1.8% by the end of Tuesday trading. The share price is currently $164.40 ahead of Wednesday’s opening.

Analysts at investment firm Wedbush have kept PepsiCo stock as an Outperform rating with a target share price of $195. So far, Pepsi has dropped 8.37% in value since the start of the year as consumer spending habits have been squeezed by high inflation and interest rates.

Pepsi’s rival Coca-Cola also made gains on Tuesday, climbing over 2%. The move was welcomed after last week’s dismal share price performance, where Coca-Cola closed at its lowest point since December 2021. The stock has lost 18% overall and is on track to match its worst performance since 2008. Coca-Cola reports its third-quarter earnings later this month.

The bottom line

PepsiCo needed to pull it out of the bag to halt the share price from steadily marching downward, and the earnings report impressed Wall Street enough. Volume growth may become a concern in the short and medium term, as price rises will only go so far before consumers start shopping around for cheaper options.

As for the weight loss drug worries, it’s clear the impact isn’t really there right now. But the likes of PepsiCo and Coca-Cola aren’t resting on their laurels anytime soon and will continue to try and counteract an industry that’s set to take off – even if the drugs are expensive.