There will be no let-up in earnings season this week -- that much is for sure. But even outside of the next data flurry to sift through, most of February is poised to bring a host of new stories to the fore that we will all be discussing into April.
I am not bracing for blowout numbers given PepsiCo's (PEP) size, currency headwinds and ongoing industry challenges in the traditional soda businesses. I do anticipate the overall quarter to be superior to that of Coca-Cola (KO), which is likely to kick off a fresh debate on whether embattled CEO Muhtar Kent should be shown the door (I believe he should). Regardless of the quarter from Pepsi, the story that is likely to emerge is if stakeholder Trian Partners is going to gain greater leverage soon to split the company into two pieces. I don't believe Pepsi should or has to split (and don't expect an announcement on this front by any means shortly), nor do I think CEO Indra Nooyi is doing the type of unsavory job that many in the finance realm pontificate about. Nooyi has been a value creator, bottom line.
Here are several off-the-cuff thoughts:
- Pepsi's snack business help Pepsi sell drinks; you could see this in the store marketing. That drives shareholder value over time, maybe not as quickly as a Trian wants, but it does accrue.
- Pepsi's snack business helps link the company to the perimeter of the grocery store, where you could find other products (often coconut water and Sabra hummus) by the company.
- Splitting off the snacks business would be a huge internal undertaking that probably dents shareholder value and limits long-term upside potential from partaking in the growing health and wellness trend in the U.S.
If you're hell-bent on playing the packaged-goods space, favor PepsiCo over Coca-Cola or General Mills (GIS) over Kellogg (K). The state of Kellogg is particularly alarming. Management has been slow to evolve key cereal and snack brands to tap into the health and wellness craze. It may be at least six months before the company's renovated iconic brands start yielding glimmers of sales hope for 2016.
Fourth-quarter results from burrito king Chipotle (CMG) are due out later today. Is a gangbuster quarter forthcoming in light of McDonald's (MCD) struggles? I think the quarter was strong, but not through the roof as seen in the third quarter due to tough year-earlier sales comparisons. The company is also unlikely to signal a menu price increase this year on the heels of implementing one in 2014. I'd sit out of Chipotle shares into the earnings report and opt for a DineEquity (DIN) or Buffalo Wild Wings (BWLD) as short-term holds and wagers on improved discretionary consumption and enhanced menus.
Three things to listen for on the Chipotle earnings call:
- Access to real estate (has become tight).
- Trading down on the menu to cheaper options amid the 2014 menu price increase (did see some of this in 3Q14).
- Inflation of costs of goods sold (should be starting to normalize, especially in proteins).
Shares of some of the largest apparel stocks have been hit in the past month even as gas prices slid and holiday sales were reasonably OK at major retailers. What makes the move even weirder is that the likes of VF Corp. (VFC), Ralph Lauren (RL) and Perry Ellis (PERY) all have a major tailwind at their backs this year in cheaper cotton prices. My guess: Poor weather has led to discounting in January and cautious order-taking for the spring. I wouldn't' try to step in here on the premise the sector is massively undervalued. Remember that I cautioned about getting in on Uggs maker Deckers Outdoor (DECK) pre-earnings last week, in spite of the stock's pre-earnings drop. The stock was slaughtered, despite the improved macro environment in the U.S.