Where Will Pepsi Go Post-Earnings?

With shares of Pepsi (NYSE:PEP) trading around $79, is PEP an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework.

T = Trends for a Stock’s Movement

Pepsi operates as a food and beverage company worldwide. The company is organized into four business units: PepsiCo Americas Foods; PepsiCo Americas Beverages; PepsiCo Europe; and PepsiCo Asia, Middle East, and Africa. It manufactures, markets, and sells a range of salty, convenient, sweet, and grain-based snacks; carbonated and non-carbonated beverages; dairy products; and other foods. Convenience foods are seeing significant demand worldwide as consumers in growing economies are opting for these products. Pepsi stands to see a continued rise in profits for many years as a leading provider of quick, convenient, inexpensive, and enjoyable products worldwide.

Pepsi on Thursday reported its fourth-quarter and full-year 2013 results and announced a substantial increase in its targeted shareholder cash returns for 2014, as well as an extension of its $1 billion annual productivity savings targets through 2019. The company also announced 2014 financial targets that are consistent with its long-term goals. “We are pleased to report that PepsiCo achieved its financial goals for 2013, despite continued challenging and volatile macroeconomic conditions around the globe. We met or exceeded our organic revenue, cash flow, productivity, and core operating margin, constant currency EPS, and net ROIC targets and, at the same time, continued to invest in our brands, innovation and execution to strengthen the long-term health of our business,” said Chairman and CEO Indra Nooyi in a press release.

T = Technicals on the Stock Chart Are Mixed

Pepsi stock has seen a consistent uptrend in the last several years. However, the stock is currently pulling back and may need time to stabilize. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Pepsi is trading below its rising key averages, which signals neutral to bearish price action in the near-term.

PEP

Source: Thinkorswim

Taking a look at the implied volatility (red) and implied volatility skew levels of Pepsi options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Pepsi options

16.1%

26%

24%

What does this mean? This means that investors or traders are buying a small amount of call and put options contracts as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

March Options

Steep

Average

April Options

Steep

Average

As of Thursday, there is average demand from call buyers or sellers and high demand by put buyers or low demand by put sellers, all neutral to bearish over the next two months. To summarize, investors are buying a small amount of call and put option contracts and are leaning neutral to bearish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Pepsi’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Pepsi look like and more importantly, how did the markets like these numbers?

2013 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

5.66%

1.65%

36.17%

-2.82%

Revenue Growth (Y-O-Y)

0.82%

1.54%

2.12%

1.23%

Earnings Reaction

-2.86%*

2.07%

-0.64%

3.04%

*As of this writing.

Pepsi has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with Pepsi’s recent earnings announcements.

P = Average Relative Performance Versus Peers and Sector

How has Pepsi stock done relative to its peers, Coca-Cola (NYSE:KO) – Dr Pepper Snapple (NYSE:DPS), and Monster Beverage (NASDAQ:MNST) — and sector?

Pepsi

Coca-Cola

Dr.Pepper Snapple

Monster Beverage

Sector

Year-to-Date Return

-4.56%

-6.27%

3.04%

4.52%

-1.81%

Pepsi has been an average performer, year to date.

Conclusion

Pepsi provides convenient and affordable beverage and food items to consumers in a multitude of countries around the world. The company today reported fourth-quarter earnings that beat expectations. The stock has been moving higher in recent years but is now pulling back. Over the last four quarters, earnings and revenues have been rising, which has left investors pleased about earnings announcements. Relative to its peers and sector, Pepsi has been an average year-to-date performer. WAIT AND SEE what Pepsi does this quarter.

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