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PepsiCo Raises Guidance as It Continues Betting on Consumer Strength

Published 10/10/2023, 20:40
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PepsiCo Inc (NASDAQ:PEP) shares were trading modestly higher on Tuesday after the company reported better-than-expected results for its third quarter, paving the way for another guidance hike.

Shares gained as the new outlook reflects the company's optimism, which is likely based on multiple price increases implemented across its major markets and strong demand for its snacks and beverages.

How PepsiCo Performed in Q3

PepsiCo reported core earnings per share of $2.25, surpassing the average analyst estimate by 10 cents. Organic revenue rose 8.8%, higher than the analyst expectations for growth of 8.3%. Net revenue came in at $23.45 billion, rising from $21.97 reported for the same year-ago period and coming in just ahead of the consensus of $23.39 billion.

Sales in PepsiCo’s largest business segment by revenue – Beverages North America – came in at $7.16 billion, while analysts were looking for $6.98 billion. Frito-Lay North America sales rose 7% year-over-year to $5.95 billion, in line with estimates.

“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,” said Chairman and CEO Ramon Laguarta.

PepsiCo said it generated $3.7 billion from sales in Europe, which was disappointing given that the market was expecting $3.87 billion. Still, Latin America combined with North America helped fuel the sales beat with sales in the former rising 21% YoY to $3.06 billion.

Citing “the strength of our businesses and categories”, the company now expects its full-year 2023 core constant currency EPS to increase 13%, up from the prior 12%. The FY organic revenue is still seen increasing 10%.

“We believe that our businesses can continue to perform well in the coming years with category growth normalizing, as we have made numerous investments in our brands, manufacturing capacity, go-to-market systems, supply chain, technology, and people, to execute against our strategic framework and modernize our company,” Laguarta added.

This marks the third consecutive quarter that the snacking and beverage giant has lifted its full-year outlook. However, despite raising its profit forecast and implementing price increases, PepsiCo once again experienced a decline in its volume.

It appears that the company's efforts to offset inflation through price hikes have had an adverse impact on consumer demand for its products. Analysts highlighted in the past that companies like PepsiCo must strike between managing costs and ensuring continued customer interest and sales growth.

Consumer Confidence Waning

Pepsico’s earnings report comes as officials are increasingly worried that the U.S. consumer won’t be able to sustain pressure from higher rates while inflation remains above historical averages.

Just a week ago, JPMorgan (NYSE:JPM) CEO and one of the world’s sharpest finance minds, Jamie Dimon, warned that the world is not prepared for rates at 7%, hinting that the Fed and other central banks may be forced to hike more to prevent inflation from staying at recent levels.

While most analysts anticipate the central bank to raise interest rates just once more, likely in November, with a modest 0.25 percentage point increase from the current range of 5.25%-5.50%, Dimon has offered a contrary perspective.

In a recent interview with Bloomberg TV, Dimon said:

There is a possibility the central bank could opt for a more aggressive stance, hiking rates by an additional 1.5 percentage points, taking them up to 7%.

If this scenario were to unfold, it would mark the highest federal funds rate since December 1990. This perspective from Dimon aligns with his earlier comments made in a recent interview, where he emphasized that the world is not adequately prepared for interest rates at the 7% level.

Hence, Dimon argues that Americans should be ready for the possibility of a significant increase in interest rates.

“The consumer is still in good shape,” Dimon told Bloomberg. “They’re still spending money and they still have more money than they did pre-Covid.”

A substantial increase in interest rates, such as the speculated 7% rate, could have significant repercussions on the economy. Dimon points out that such a move has the potential to dampen both consumer spending and business investment. Higher interest rates can lead to increased borrowing costs for individuals and businesses, which can curtail their ability and willingness to spend and invest.

Moreover, an abrupt and substantial rate hike could result in a slowdown in economic growth. It can reduce the affordability of loans, impacting various sectors including housing, automotive, and business expansion.

DoubleLine Capital CEO Jeffrey Gundlach – better known as "The Bond King" – echoed similar concerns.

"I think that everything but employment is showing stresses, and it's been going on for a while now ever since they did the stimulus," Gundlach said.

"I think that's because the government response was so ridiculously outsized. It was really the 2021 free money that is puzzling because it brought on inflation, which anyone sensible, you should've known that it would."

Arguably the worst case for the U.S. economy and consumers would be stagflation, which is characterized by low economic growth, high inflation, and high interest rates. This combination can be particularly challenging for policymakers to address, as the usual tools used to combat inflation (raising interest rates) can exacerbate the economic slowdown.

Summary

PepsiCo shares rose modestly on Tuesday after the snacking and beverage titan hiked its EPS guidance for the third time this year. The report comes at a time of heightened concerns about the state of the U.S. consumer, which continues to be pressured by higher rates and elevated costs of living.

Shane Neagle is the EIC of The Tokenist. Check out The Tokenist’s free newsletter, Five Minute Finance, for weekly analysis of the biggest trends in finance and technology.

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