In recent days, the talk among colleagues has been one of what stocks to own in a tough environment for equities. In my circles, a small number of names came up regardless of whom I was speaking to. One of those names in PepsiCo (PEP) . I wrote the name up in Market Recon on Monday morning. I mentioned the name on the Claman Countdown on the Fox Business Network again that night. You would think that I might own the shares. Funny story.
Though I was indeed long the other names that I have discussed as either dividend payers or defensive type names, I was going to be smart and buy PepsiCo ahead of earnings at $132 or $133. I did bid. My levels. The shares came close. Close only counts in hand grenades and horseshoes. Tried to get $135 in the pre-opening session. Big swing and a miss. What now? If you came in flat this name, so did I. Let's dance.
The closing bell had rung. A risk off day, no make that two risk off days had come to an end. PepsiCo put the firm's fiscal third quarter results to the tape. The firm posted adjusted EPS of $1.56 on revenue of $17.188 billion. These numbers for PEP mean a second straight month of contraction in year over year earnings growth on 4.2% net sales growth. Both lines topped Wall Street expectations which is what matters this morning.
The real positive take-away was in the guidance. CEO Ramon Laguarta states: "Given our performance year to date, we now expect to meet or exceed our full year organic revenue growth target of 4%." There is more, but that was really what overnight traders needed to hear. The firm also reaffirmed guidance for full year EPS toward $5.50, while free cash flow remains on track for $5 billion-ish. PepsiCo expects full year returns to shareholders to wind up in the neighborhood of $8 billion, $5 billion in the form of dividends, with the balance in share repurchasing. About that dividend, which you know is important to me, the firm currently pays $3.82 annually for a yield of 2.85%, and the firm has a track record of increasing this dividend every year going back over decades.
There is no secret that in American culture, salty snacks lead the way. I won't eat them, but I am willing to invest in them. It should not surprise that Frito-Lay North America contributed $4.11 billion toward revenue, good enough for growth of 5.5%. What might surprise would be that North American Beverages also hit the ball out of the park for a $5.64 billion number (+3.5%) as labels such as Gatorade, no-sugar Gatorade Zero, and even Bubly continue to show progress.
Outside of North America, Europe - Sub Saharan Africa showed whopping growth of 6% to reach $3.35 billion in revenue, If there is room for improvement, it would be in Latin America where performance has been far more pedestrian in nature.
For regular readers, you've seen this chart recently.
Now, let's zoom in...
What I now see is just how strong support at the 50 day SMA was earlier this week. Like coming off of a trampoline, the shares work their way toward the upper trendline of our Pitchfork. Relative strength has obviously turned north, and the daily MACD appears ready to cross the 12 day EMA over the 26 day EMA. That's a short-term bullish signal.
Trade Idea (minimal lots)
I have taken a couple of steps in my attempt to turn a buck in this name. What I have done is...
- Sell one PEP $125 January put (current value: $1.70)
- Purchase one PEP $140 October 4th call (current value: $0.62)
- Purchase one PEP $138 October 4th put (current value: $0.50)
Net credit: $0.58
Notes: What I have done is purchase a 138/140 strangle that expires tomorrow in the hopes that the shares just move outside of this range by then. The first step finances the long "strangle" (and more) by exposing myself to having to purchase equity at 125 in January, which is below where I want to buy them anyway. Oh, by the way, I am bidding for the equity well below the last sale, should markets give these gains up later today.