PepsiCo (NYSE:PEP) will announce its Q1 earnings on Thursday. After a difficult last quarter, 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. 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 $69, which is about 5% above the current market price.

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PepsiCo stated that it will spend an additional $600 million on advertising and marketing with a greater focus on soft drinks in North America. Pepsi‘s market share in the U.S. has continually declined in the last few years partly due to the brand being neglected but with focus now back on soft drinks, we expect it to maintain its market share going forward.

Gatorade is another beverage to watch out for. In 2011, its volume grew 9% to touch 1 billion gallons.^[1] After the marketing fiasco in 2009, PepsiCo has successfully rebranded the product and extended the brand to include protein shakes and bars to target the overall sports nutritional market in the U.S. worth an estimated $20 billion.

The increased marketing spend means the company will have to incur a greater expense, primarily in the form of selling, general and administrative (or SG&A) expenses. For 2012, we expect an increase in the SG&A, as a percentage of gross profits. However, as the move begins to reap its benefits, we should see a decline in the figure.

Frito-Lay to Continue its Growth Momentum

Frito-Lay continues to remain the No. 1 potato chip brand globally. Recently, PepsiCo even announced that the annual retail sales of its global “Banner Sun” potato chip portfolio within the Frito-Lay division had surpassed $10 billion. In March, Frito-Lay also extended its SunChip brand by introducing 6 Grain Medley in 2 flavors: Parmesan & Herb and Creamy Roasted Garlic.

We expect Frito-Lay’s market share to rise gradually from 39.1% in 2011 to 39.7% by the end of Trefis forecast period. International market share in 2011 was boosted by the acquisition of Grupo Mabel, the second largest maker of cookies in Latin America, in a deal valued at $520 million. The company is also pumping in more than $100 million to build a plant in India to manufacture corn-based snacks that will see the total manufacturing capacity rise by about 15% in the country.

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