PepsiCo Posts Solid Earnings But Cautious on 2012

PEP: PepsiCo logo

PepsiCo (NYSE:PEP) reported strong revenue growth buoyed by impressive growth in snacks, especially in the emerging markets as the company announced its Q4 and full year earnings on Thursday. Net revenues for the quarter rose 11% to $20.2 billion. Profitability was impacted as net income grew by only 4% to $1.4 billion primarily because of higher commodity costs. The snacks segment continued to do well with volume rising 8% during the quarter. However, the worldwide beverage volume could only manage a 3% increase. PepsiCo competes with leading food & beverage companies around the world including Kraft Foods (NYSE:KFT), Coca-Cola Co (NYSE:KO) and Dr Pepper Snapple (NYSE:DPS).

We maintain a price estimate of $71, which is about 10% above the current market price. We are in the process of revising our estimates to incorporate Q4 estimates.

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The snacks segment performed exceptionally in Asia, Middle East & Africa (AMEA) region with volumes witnessing a 15% growth during the quarter. PepsiCo also plans to set up a $100 million plant in India to introduce its corn-based snacks in the country. The international snacks market size is more than $37 billion. Moreover, it is growing at a healthy rate and Frito-Lay has a 38% market share.

2012 Outlook

PepsiCo continues to struggle in beverages in the North American region. Growth in non-carbonated beverages was negatively offset by a decline in Carbonated Soft Drinks (CSDs). The CSD portfolio comprises Pepsi, 7UP, Diet Pepsi, Mirinda, Mountain Dew, among others. Total volume for the quarter declined by 4% in the region. PepsiCo plans to increase the marketing spend on its beverages by $500-600 million with more focus on the North American region.

The company forecasts a 5% decrease in the core, constant currency EPS for the year 2012 primarily due to the negative impact of increased marketing spend, firm commodity prices and higher pensions and taxes. However, beyond 2012, it expects a high single digit growth in its core constant currency EPS.

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