Article / 02 October 2015 at 10:36 GMT

Earnings Watch: Macro headwinds blow PepsiCo off course

Head of Equity Strategy / Saxo Bank
Denmark
  • Third-quarter earnings season about to get underway
  • PepsiCo set to disappoint as strong dollar, health concerns hit LatAm sales
  • Samsung continues to face fierce pressure from cheaper Chinese rivals
  • Uniqlo parent Fast Retailing likely to post another solid quarter

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Pepsi's operations in the likes of Bolivia have been hit by falling sales. Photo: iStock 

By Peter Garnry

Companies have just closed the third-quarter books and are hurrying to prepare the numbers for investors. 

Twelve companies in the S&P 1200 Global Index report earnings next week with the most important PepsiCo, Yum! Brands, Tesco, Samsung Electronics, Monsanto, Fast Retailing and Alcoa. Not all of these earnings releases following the calendar year.

Macro headwinds

PepsiCo delivers Q3 earnings on Tuesday 1030 GMT with analysts expecting EPS of $1.27, down 6.6% year-on-year and revenue of $16.2 billion, down 5.9% y/y. A stronger dollar and slowing demand in key markets are weighing on the beverage and snack business. 

Despite flat top-line growth since 2011, its shares have continued to surge as investors have hunted stable businesses with easy-to-forecast earnings. 

PepsiCo shares have outperformed its global benchmark by 17 percentage points since early 2014 and in the last 19 quarters the company has surprised to the upside on earnings (see chart below).

PepsiCo historical earnings
 
PepsiCo is facing macro headwinds from a stronger USD reducing profits in its overseas businesses which are 49% of revenue. In addition the global health trend has translated into declining revenue in its Americas beverage business in the last 3-4 years.

The shares are fairly priced at this point and it is difficult to see the catalyst from here despite the drag from the dollar fading. We acknowledge that PepsiCo should trade at a premium to the market as the business is more stable and easier to forecast, but the low growth and lack of margin expansion will make it difficult for the stock price to outperform the market from here.

Can Samsung end the revenue decline?

Samsung reports Q3 earnings on Wednesday with EPS expected to climb 25% y/y and revenue expected to grow 6.6% y/y. The bleeding has stopped in the mobile and semiconductor segment despite ongoing downward price pressure on PC DRAM.

Samsung weekly share price since 2005
Samsung share price
Source: Bloomberg

With trailing EV/EBITDA of 2.9x compared to historical average of around 4.5x, the valuation looks cheap, but it obviously reflects a gloomy outlook as the former profit engine in mobile is getting hurt from the ongoing commoditisation driven by fierce competition from Chinese players such as Xiaomi. 

Despite low valuation it is difficult to see the upside catalyst in the near term. The risk-off moves in emerging-market equities have also hurt Samsung shares.

Dressed up Uniqlo

Fast Retailing, the parent company behind the fast-growing fashion brand Uniqlo, reports FY15 Q4 earnings on Thursday. Both revenue and earnings are expected to post solid double-digit growth rates. 

Last quarter, the company beat consensus forecasts for revenue and profit driven by strong results in Asia. Shares are up 8% for the year after being up 36% before the global rout in equities.

With trailing EV/EBITDA of 18x it trades at a 25% premium to H&M which is difficult to justify given both companies have the same growth trajectories. On that basis we are not bullish on Fast Retailing's stock but is preferring H&M shares instead.

All earnings releases next week can be found in the attached PDF.

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 Uniqlo's flagship Sanlitun store in Beijing attracted some controversy in July when one of its changing rooms was used for a tryst, but parent company Fast Retail is flying. Photo: iStock

— Edited by Martin O'Rourke

Peter Garnry is head of equities strategy at Saxo Bank


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Earnings Watch 2015-10-05

4y
Peter Garnry Peter Garnry
PepsiCo delivers Q3 core EPS $1.35 vs est. $1.26
4y
Peter Garnry Peter Garnry
Q3 sales $16.3B vs est. $16.1B
4y
Peter Garnry Peter Garnry
PepsiCo shares trade 98.00/98.50 in pre-market vs yesterday's close of $95.81

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