Tuesday, April 26, 2011

Pepsico Inc. (NYSE: PEP): Q1 Earnings Preview 2011

Pepsico Inc. (NYSE: PEP) is scheduled to release its first-quarter earnings before the opening bell on Thursday, April 28, 2011. Analysts, on average, expect the company to report earnings of 73 cents a share on revenue of $11.71 billion. In the year ago period, the company posted earnings of 76 cents per share on revenue of $9.37 billion.

PepsiCo, Inc. manufactures, markets, and sells various snacks, carbonated and non-carbonated beverages, and foods worldwide. The Company’s portfolio includes oat, rice and grain-based snacks, as well as carbonated and non-carbonated beverages, in over 200 countries.

At its last earnings call in January, the company warned that rising prices of commodities—whether corn for Doritos or crude oil used to make plastic bottles—coupled with a hazy economic outlook, particularly in developed markets, will constrain earnings in the coming years. PepsiCo's sizable food business makes it much more exposed to commodities.

In the preceding fourth quarter, Purchase, New York-based company's net income was $1.37 billion, or 85 cents per share, compared to $1.43 billion, or 90 cents per share, in the prior-year quarter. On an adjusted basis, the company earned $1.05 in the fourth quarter. Revenue jumped 37 percent to $18.16 billion from $13.30 billion Analysts, on average, expected the company to report earnings of $1.04 per share on revenue of $17.62 billion.

Recently, PepsiCo reaffirmed that it still expects fiscal year 2011 earnings per share growth of 7 to 8 percent from core earnings per share of $4.13 in 2010. PepsiCo expects fiscal 2011 organic net revenue growth, on a core constant currency basis and excluding the impact of the acquisition of Wimm-Bill-Dann Foods OJSC, in line with its long-term goal of mid-single-digit core constant currency net revenue growth from pro forma net revenue of $59.6 billion in 2010. 

Industrywide sales of carbonated soft drinks had been falling in the United States even before the recession slammed the brakes on consumer spending. Some consumers, taking heed of growing awareness of nutritional health, opted for drinks such as bottled water, juice and tea. 

Beverage Digest recently reported that Atlanta-based Coca-Cola (NYSE: KO)  sold nearly 927 million cases of its diet offering in 2010, to reach a market share of 9.9% — ahead of PepsiCo’s PEP -0.16%   namesake beverage, which moved 891.5 million cases and held a market share of 9.5%. Regular Coke held firm to its dominant No. 1 position with sales of 1.59 billion cases and a share of 17%.

On the bright side, a strong new product pipeline, robust international sales, on-going manufacturing productivity initiatives, and an active stock program are all positives for PepsiCo. PepsiCo International too is reporting growing revenues and profits across many regions, especially developing markets. Asia Pacific markets, such as China and India, are leading the way with double-digit volume increases in snacks and beverages. The Middle East and Africa region is also seeing excellent results from countries such as Turkey and Egypt.The company has been investing significantlyincountries like China, Mexico and Russia over the past few years.

PepsiCo’s heightened emphasis on nutritious convenience foods puts the company in position to grab market share at a time when consumers are becoming increasingly health-conscious. The market share gains from increased focus on nutritious food offerings could increase profitability for PepsiCo’s Quaker Foods, Tropicana, and Gatorade product lines. New distribution of healthy food products in China and a low-calorie fruit puree set to test U.S. markets could spark market share gains for the company. A new Gatorade product line expected for Spring 2011 could also advance the company’s market penetration.

PepsiCo is now getting ready to slim down this summer by offering a cola with 40 percent of the calories of its Pepsi-Cola soft drink. The new drink, called Pepsi Next, will have 40 calories per 8-ounce serving, or 60 calories per 12-ounce can, according to Beverage Digest. Regular Pepsi has 100 calories per 8-ounce serving and 150 calories per 12-ounce can. Diet Pepsi has no calories. Beverage Digest, citing sources, said the new drink may be launched in July or August.

Also, the company has started to introduce a new line of healthy food options in China, where reports of chronic illnesses have been increasing. As consumers become more health-conscious, Pepsi and some of its competitors in the global packaged food market are introducing foods that include traditional Chinese folk medicine ingredients like wolfberry plants, chrysanthemum teas and tremella. 

The company's stock currently trades at a forward P/E (fye Dec 25, 2012) of 13.82 and PEG ratio (5 yr expected) of 1.85. In terms of stock performance, PepsiCo shares have gained nearly 3 percent since the beginning of the year.

Full Disclosure: None.
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