PEP Earnings Lift Stock Off 6-Year Low, Consumer Pinch Hits Outlook

Sam (0:01)

We're back on Morning Trade Live. Let's focus on the chart for PepsiCo. It's been a really tough year here. Shares hitting six year lows in the session yesterday. We've got some earnings. It did look like a beat on what we heard for the quarter, but it was the guidance that seemed to be the fly in the ointment, but we are trading higher by 2.3% right now. So we are making up for some of that lost ground.

Let's dig into this earnings report from PepsiCo. That is the focus of the morning trade. So joining us now to do that is Alex Coffey. Obviously, it looks like international seems to be offsetting the weakness here domestically. Alex, just walk us through what we learned.

Alex Coffey (0:37)

Yeah. Good morning, Sam. You look at Pepsi shares trading up about 2.4% here in the early trade. This is after the company delivered a third quarter beat on revenue and profit with organic sales growth of 3.1% topping expectations. International operations, as you mentioned, remain a bright spot with strong growth across Latin America and its Europe, Middle East and Africa segments. Also just generally its international beverages business has been stronger. But investors are also focused on a more cautious outlook. Pepsi cut its full year core constant currency EPS forecast to grow just 1-2%.

This is down from its prior 4-6% range. Management said it's acting with urgency to improve performance in North America, where both snacks and beverages continue to face pressure from a value conscious consumer. The company's CEO was also particularly blunt on the company's soft drink business saying, quote, we don't feel good about the beverage business as North America beverage volumes have fallen 3% year to date. Pepsi plans to step up investments in brands including Pepsi, Mountain Dew and Poppy, while also identifying additional cost cuts to help fund those efforts.

On the street, largely, Sam, analysts have said the quarter was better than feared, with strength overseas helping to offset a slower than expected turn around in North America. As you mentioned, as I said earlier, though, the share is up about 2.34% here in real time.

Sam (2:15)

Okay, so we are seeing a positive reaction, at least for now. But as we've mentioned, a tough year here for shares in Pepsi. Thanks so much for the breakdown of the report, Alex. Let's trade the stock now with Joe Tigay, Portfolio Manager of the Rational Equity Armour Fund. Good morning, Joe. How would you approach an example trade for this one? I mean, trading at 60-year lows just yesterday.

Joe Tigay (2:34)

Yeah, trading at lows, I think, you know, it's a value stock and people are right now are maybe looking at other parts of the market. It has its rotation, of course.

Maybe there's some potential for some rotation in the near future. I think a lot of people are just going to continue to want to hold this stock. Now, we're going to initiate a new trade for myself as an example. I think I'd look at selling a put. Just going out into November, looking at the 120 put. I'd look at a cash secured put, selling that 120 put for $1.60. That'll net me $160 per 100 shares. And that'll be about a 1.3% return for a little over a month. And it'll be something like, you know, 11% annualized return if I did that every month. That's something I would not mind very much at all. Of course, this is me committing to buying it if it does drop back down below 120

Sam (3:28)

Okay, we'll be watching 126 and change right now. Thoughts on the overall market today? We've come off the lows, Joe.

Joe Tigay (3:34)

Yeah, really closely following on this volatility. A little bit of a move today, maybe fading a little bit as the market's off of its lows.

Rates are obviously very important. Watching the 10 year, every tick higher on those yields is just making things harder for companies. Now, it's going to mean that the earnings are going to have to be even better than previously expected. Now, the stock market or these companies have not had any trouble beating earnings lately. And of course, oil is a big part in all this too. Oil is kind of the wild card, can't really be controlled by any of these companies. The higher it goes, the harder it is to get inflation down, which of course is another reason for these rates being higher.

Sam (4:13)

Yeah, and obviously pulling up yields as well alongside it, and definitely keeping a lid on stocks, at least for now. Thanks Joe, really appreciate it. Joe Tigay, Portfolio Manager, the Rational Equity Alma Fund.