With U.S. inflation coming in below expectations for October, markets expected that the Federal Reserve policymakers would soon have to slow or stop the monetary policy tightening measures. However, Fed Governor Chris Waller said that markets had overestimated the significance of a single data point and that the U.S. central bank still has “a ways to go” on interest rate hikes.
Amid rising interest rates, sky-high inflation, and slowing growth, the third-quarter financial report turned out to be disappointing. Analysts are projecting that fourth-quarter U.S. earnings will decline for the first time in two years.
Moreover, economic research firm Capital Economics sees earnings disappointing the market and weighing further on stocks. Also, it expects a mild recession in the U.S. and contractions across several major developed markets.
Therefore, fundamentally strong and stable stocks PepsiCo, Inc. (PEP), Cisco Systems, Inc. (CSCO), and Sprouts Farmers Market, Inc. (SFM) might be solid buys amid the market turmoil.
PepsiCo, Inc. (PEP)
PEP manufactures, markets, distributes and sells beverages and convenient foods worldwide. The company operates through seven segments: Frito-Lay North America; Quaker Foods North America; PepsiCo Beverages North America; Latin America; Europe; Africa, Middle East, and South Asia; and Asia Pacific, Australia and New Zealand and China Region.
On September 14, 2022, PEP and Archer-Daniels-Midland Company (ADM) announced a groundbreaking 7.5-year strategic commercial agreement to collaborate closely on projects that aim to significantly expand regenerative agriculture across their shared North American supply chains.
The companies’ capabilities span the food and agriculture value chains, creating a unique, large-scale platform to support farmers’ transition to regenerative agriculture while building their resilience to climate change.
On November 17, PEP declared a quarterly dividend of $1.15 per share payable on January 6, 2023, which is a 7 percent increase compared to a year-earlier period. PEP has paid consecutive quarterly cash dividends since 1965, and this year marked the company’s 50th consecutive annual dividend increase.
PEP’s annual dividend of $4.60 translates to a 2.49% yield. Over the last five years, PEP’s dividend payouts have grown at a 7.4% CAGR. Its four-year average dividend yield is 2.80%.
PEP’s net revenue for the third quarter ended September 3, 2022, increased 8.8% year-over-year to $21.97 billion. Its non-GAAP operating profit increased 11% year-over-year to $3.59 billion. The company’s non-GAAP net income attributable to PEP increased 10.1% year-over-year to $2.73 billion, while its adjusted EPS increased 10% from the prior-year period to $1.97.
Street expects PEP’s EPS and revenue for the current fiscal year ending December 2022 to increase 8.4% and 6.8% year-over-year to $6.78 and $84.87 billion, respectively. The company has surpassed its consensus EPS and revenue estimates in each of the trailing four quarters, which is impressive.
Over the past year, the stock has gained 12.6% to close the last trading session at $184.84. It has gained 6.8% over the past month. PEP has a 24-month beta of 0.52.
PEP’s strong fundamentals are reflected in its POWR Ratings. The stock has an overall rating of B, equating to Buy in our proprietary rating system. The POWR Ratings are calculated by considering 118 different factors, with each factor weighted to an optimal degree.
It has an A grade for Quality and a B for Growth, Stability, and Sentiment. It is ranked #10 out of 35 stocks in the A-rated Beverages industry. Click here to see the other PEP ratings for Value and Momentum.
Cisco Systems, Inc. (CSCO)
CSCO manufactures and sells internet protocol-based networking and other products related to the communications and information technology industry. The company serves businesses, public institutions, governments, and service providers.
On November 10, it was reported by the office of the Prime Minister of Spain that CSCO would open a new semiconductor chip design center in Barcelona. The project aims to help Europe reinforce its own chip industry and reduce its dependence on U.S. and Asian supply, triggered by a global shortage of semiconductors and supply chain bottlenecks. These expansions should help the company grow.
On November 1, CSCO announced that it had expanded its portfolio of specializations available through the company’s world-class partner program. The six new specializations are tied to Cisco customer priorities. The expanded portfolio continues to evolve to increase partner sales opportunities, add flexibility to partner certification requirements, and emphasize the importance of multi-architectural expertise.
On August 23, CSCO declared a quarterly cash dividend of $0.38 per common share, payable on October 26, 2022.
The company’s forward annual dividend of $1.52 per share yields 3.19% at the current price level. Its dividend payouts grew 6% in the last five years. The company has a history of 11 years of consecutive dividend growth.
CSCO’s total revenue increased 5.7% year-over-year to $13.63 billion in the fiscal first quarter ended October 29. The company’s non-GAAP net income improved 2.1% year-over-year to $3.55 billion, while its non-GAAP EPS rose 4.9% from its prior-year quarter to $0.86 for the quarter.
The consensus EPS estimate of $3.55 for its current fiscal year ending July 2023 indicates a 5.6% year-over-year improvement. Likewise, the consensus revenue estimate for the same year of $54.49 billion reflects a rise of 5.7% from the prior year. CSCO has topped consensus EPS estimates in each of its trailing quarters, which is impressive.
The stock has gained 13% over the past month to close its last trading session at $48.38. CSCO’s 24-month beta is 0.83.
It is no surprise that CSCO has an overall POWR Rating of A, which equates to a Strong Buy. The stock also has an A grade for Quality and a B for Stability. In the 48-stock Technology – Communication/Networking industry, CSCO is ranked #3.
Beyond what we’ve stated above, we have also given CSCO grades for Value, Momentum, Growth, and Sentiment. Get all CSCO ratings here.
Sprouts Farmers Market, Inc. (SFM)
SFM operates as a food retailer and grocery store. The company offerings are categorized as perishable and mom-perishable. They include fresh, natural, organic food that includes fresh produce, bulk foods, vitamins and supplements, packaged groceries, meat and seafood, deli, baked goods, dairy products, frozen foods, body care, and natural household items.
On November 2, SFM announced its partnership with DoorDash Inc. (DASH), where SFM will start on-demand delivery through the DASH marketplace to cities in phases this month, beginning with Phoenix, Arizona.
Nick Konat, President, and Chief Operating Officer, said, “By partnering with DoorDash, more people will be able to access our uniquely healthy assortment and the season’s freshest, most delicious produce.”
For the fiscal third quarter ended October 3rd, SFM’s net sales increased 5.4% year-over-year to $1.59 billion. Its gross profit increased 8.1% year-over-year to $583.65 million. The company’s net income increased 2.9% year-over-year to $65.74 million, while its EPS rose 8.9% year-over-year to $0.61.
Analysts expect SFM’s revenue to come in at $6.39 billion, representing an increase of 4.7% year-over-year, while its EPS is expected to increase 10% year-over-year to $2.31. The company has surpassed the consensus EPS estimates in each of the trailing four quarters.
The stock has gained 40.5% over the past six months to close the last trading session at $33.02. It has gained 21.5% over the past month. SFM has a 24-month beta of 0.72.
SFM’s POWR Ratings reflect a promising outlook. Its overall B rating translates to a Buy. It has a grade of A for Quality and B for Growth. SFM is ranked #17 out of the 39 stocks in the A-rated Grocery/Big Box Retailers industry.
To see additional POWR Ratings for Value, Momentum, Stability, and Sentiment for SFM, click here.
PEP shares rose $0.46 (+0.25%) in premarket trading Wednesday. Year-to-date, PEP has gained 8.58%, versus a -14.83% rise in the benchmark S&P 500 index during the same period.
About the Author: Kritika Sarmah
Her interest in risky instruments and passion for writing made Kritika an analyst and financial journalist. She earned her bachelor's degree in commerce and is currently pursuing the CFA program. With her fundamental approach, she aims to help investors identify untapped investment opportunities.
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