Could PepsiCo Raise FY16 EPS Outlook Despite Reporting In-Line Q2 Results?

Jefferies expects PepsiCo, Inc. (NYSE: PEP) to report in-line results for the second quarter, but sees "ample scope" for the beverage giant to raise its FY16 core earnings guidance due to productivity savings.

PepsiCo is expected to release its second quarter numbers on July 7. Jefferies expects EPS $1.29, in line with consensus. The brokerage forecast sales of $15.456 billion, versus Street view of $15.365 billion, and sees about 3.5 percent organic sales growth.

"EMs remain a risk point, most notably Russia and Brazil, which comprise c. 10 percent of mix; however, PEP has below avg. exposure in GB (c. 2 percent vs. 5 percent group avg.), which is notable looking ahead post Brexit," analyst Kevin Grundy wrote in a note.

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Meanwhile, PepsiCo's FY16 guidance calls for about 4 percent organic sales growth and expects $4.66 core EPS (vs. the Street $4.72) with 8 percent core growth (conservative vs. 9 percent in FY13–14, and 10 percent in FY15).

"We see ~2–4 pt of potential upside to PEP's guide (i.e. ~1–2 pts from 53rd week, add'l ~1–2 points of upside to PEP's core EPS outlook), ex-a potential ~2 points from FX," Grundy highlighted.

The analyst recalled PepsiCo raised its FY EPS guidance by a point with its second quarter results both last year and the year before. Grundy, who has a Buy rating on the stock, expects EPS of $4.80 on revenue of $63.5 billion for FY16.

At the time of writing, shares of PepsiCo were up 0.91 percent to $106.59. The analyst has a price target of $119 on the stock.