What Pepsi’s strong second quarter could mean for Coca-Cola earnings

PepsiCo (NASDAQ: PEP) and Coca Cola (NYSE:KO) stocks have followed separate paths since the COVID-19 pandemic scrambled consumer demand in 2020. Both companies were hit in April as crowded events like sports and concerts were canceled and opportunities of snacks on the go have dropped.

Pepsi recently demonstrated that demand isn’t as bad as many investors feared. But there are key differences between the two rivals that suggest Coca-Cola will have worse news for its shareholders when it announces second-quarter results on July 21.

Let’s take a closer look.

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Drop in beverage demand

Pepsi has revealed a sharp decline in beverage demand which nonetheless implies better news for Coca-Cola’s upcoming report. Its beverage volume contracted 11% compared to a 7% increase in the previous quarter. CEO Ramon Laguarta and his team blamed plummeting customer traffic at places like convenience stores, theaters and gas stations for the decline, which was only partially offset by increased demand at chains of supermarkets. Coke’s latest update showed a 25% drop At the beginning of Aprilbut Pepsi’s report suggests the trends didn’t stay that low for long.

However, Coke’s business is almost entirely beverage-based, while Pepsi generates a lot of sales through snacks and packaged food sales. This broader portfolio helped it report flat organic sales for the quarter, with overall revenue down just 3%. Coke, on the other hand, is expected to report a revenue drop of more than 25% in its Tuesday report.

Worst financial news

The outlook is even worse for the drinks leader’s finances. Pepsi reported a painful drop in profitability as sales shifted away from these high-margin take-out products. Management also had to spend more than $400 million in pandemic-related health and safety expenses.

Coke’s results will be influenced by the same negative trends, but they will be amplified by its larger sales deficit. It’s no wonder, then, that Pepsi is still planning to send about $8 billion to shareholders in direct cash returns while Coke has been busy taking on new debt. Most investors who follow the stock expect earnings to fall to around $0.41 per share this quarter from $0.63 per share a year ago.

Looking forward to

Coke is in the same uncertain position as Pepsi when it comes to trying to project sales trends amid continued outbreaks and economic contraction. Still, its second quarter result runs through the end of June, while Pepsi’s ended in the middle of the month. This small difference is usually insignificant, but it could give CEO James Quincey and his team more clarity at a time when consumer demand changes from week to week.

Sales volumes had increased by around 3% in early March before collapsing by 25% the following month. Coke’s comments on the fiscal third quarter will likely fall somewhere within that wide range of results. But, while Pepsi predicted a quick return to modest growth and milder declines in profitability, Coke is almost sure to warn investors to prepare for bigger declines both up and down until the end. end of 2020.

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