ANF - Wall Street Lunch: PepsiCo Sales Shine

2023-10-10 12:07:00 ET

Summary

• PepsiCo reports organic sales growth of 8.8% in Q3, surpassing expectations.
• BofA upgrades Electronic Arts; Moody's downgrades Lincoln National's debt rating.
• Climate change is negatively impacting the ski industry – Barclays.

Listen below or on the go on Apple Podcasts and Spotify

PepsiCo (PEP) reports solid Q3 organic sales growth. (0:15) PC market set to rebound in Q4. (3:35) Barclays digs into climate change impact on the ski season . (4:10)

This is an abridged transcript of the podcast.

Our top story so far

PepsiCo ( PEP ) reported organic sales up 8.8% year over year in Q3. That topped consensus expectations for an increase of 8.3%.

And so far, weight-loss drug Ozempic hasn’t hampered demand, with Pepsi’s CFO saying on the conference call, “We are not seeing any impact that we can detect in our numbers right now.”

Organic sales growth was led by strong gains in Europe (+13%) and Africa/Middle East and South Asia (+17%) during the quarter.

Pricing drove growth during the quarter again, with volume flat for the beverages business and down 1.5% for the convenient foods business.

Operating profit was up 20%, led by gains in the PepsiCo Beverages North America (+24%) and Latin America (+28%) segments. EPS came in at $2.25 vs. $2.15 consensus and $1.97 a year ago.

Looking ahead, Pepsi now expects full-year 2023 EPS to increase 13% vs. the prior forecast of +12% and continues to expect full-year 2023 organic revenue to increase 10%.

CEO Ramon Laguarta says full-year 2024 organic revenue and core constant currency EPS growth is expected “to be towards the upper end of our long-term targets.”

In today’s trading

Stocks are higher, but the direction is far from firm. The S&P 500 (SP500), Nasdaq (COMP.IND), and Dow ( INDU ) are up +0.5%.

Buying enthusiasm is waning a bit after the surprise rally in the previous session as investors managed to shake the risk-off sentiment.

Treasury yields are making big moves, but that is mainly catch-up to global rates after the bond market was closed for Columbus Day. The 10-year Treasury yield (US10Y) is back down around 4.70%. That’s well off the earlier lows, though.

Oil (Cl1:COM) and gold ( XAUUSD:CUR ) are easing back.

JPM Global Commodities Research says uncertainty notwithstanding, they maintain their Brent end-year price target of $86 per barrel, “while acknowledging that the prospect of a geopolitical peace discount that was achieved via the Saudi-Iran peace deal brokered by China in March and Iran and Saudi acceptance to the BRICS group in August has once again turned into a geopolitical risk premium.”

They say nonetheless that “near-term supply-demand balance and the resulting change in oil inventories remain the main fundamental drivers.”

Among active stocks

Jefferies walked away from a meeting with management at Abercrombie & Fitch ( ANF ) convinced that the mall retailer is well-positioned to drive healthy growth in the quarters ahead. Analyst Corey Tarlowe and team see sales momentum continuing. Multiyear efforts spanning marketing, product, and in-store presentation are said to have yielded unique brands that strongly resonate with distinct audiences.

Bank of America upgraded Electronic Arts (EA), arguing that the discount in its stock compared to its peers is "unwarranted." Analyst Omar Dessouky moved his rating to Buy from Neutral and bumped his price target to $150 from $145, noting that the recently released soccer game FC 2024 is just the first of "many catalysts."

Moody's Investors Service downgraded Lincoln National Corp.'s ( LNC ) senior unsecured debt rating to Baa2 from Baa1. That is the second-lowest investment-grade rating and reflects a large Q3 2022 actuarial assumption charge. Moody’s says Lincoln “still faces headwinds in terms of future capital generation and profitability."

In other news of note

The PC market is expected to begin recovery in the fourth quarter, according to research firm Gartner.

Gartner said worldwide shipments of PCs decreased 9% to 64.3 million units in Q3, marking the eighth consecutive quarter of decline. But Gartner’s Mikako Kitagawa said that there is evidence that the decline has finally bottomed out and the worst could be over by the end of 2023.

Kitagawa adds that vendors have made progress towards reducing PC inventory, and inventory is expected to return to normal by the end of 2023 as long as holiday sales do not collapse.

And in the Wall Street Research corner

Barclays warns of climate change impact on snow sports.

They say declining snowfall and climate warming has impacted the number of viable ski days, as well as increasing costs of mitigation efforts, which are affecting the ski industry.

El Niño may also affect the upcoming season in the short term, potentially with a “normal to solid” ski season in the West and Southern regions and a hotter and dryer Northeast region.

Last year, those same factors had a negative net impact on the performance of Vail Resorts (MTN).

The total amount of snowfall, the number of days with accumulated snowfall that is greater than 30 centimeters, and having at least three days of temperatures lower than 32 degrees affect the ski season. Those have seen declines over the last 20 to 30 years.

Barclays advises investors to build in “relatively more risk” to its annualized earnings power.

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