PepsiCo Earnings Preview: What We Are Watching

PepsiCo (NYSE:PEP) is scheduled to announce its earnings on 9th February, 2012. Once again, the snack segment, and not the its core soft drink business, will lead the growth. Recent acquisitions in Latin America will help the company delve deeper into high growth potential regions of the world. PepsiCo competes with leading food & beverage companies around the world including Kraft Food (NYSE:KFT), Coca Cola Co (NYSE:KO) and Dr Pepper Snapple (NYSE:DPS).

We maintain a price estimate of $71, which is about 5% above the current market price.

See our complete analysis of PepsiCo

Snack Segment Continues To Do Well

PepsiCo possesses strong pricing power in the Latin American region. In the first nine months of 2011, net revenues, as well as the operating profit, witnessed a 17% growth even though the volumes increased by only 4%. The company also acquired Brazilian cookie maker Grupo Mabel in a deal estimated to be more than $500 million. PepsiCo is also looking to acquire Marilan Alimentos, the country’s fourth largest cookie maker. These are significant investments in a country which is the world’s second largest cookie and cracker producer.

The snack segment continues to perform strongly in Asia with volume in India, China and the Middle East all witnessing a double digit growths in the first nine months of 2011. Growth in snack segment can be attributed to product innovations suited to the local tastes of the consumers. Moreover, PepsiCo’s diverse portfolio with variegated pricing appeals to a large consumer base. Recently, the company also announced its plan to set up a $100 million plant in India to produce its corn based snacks.

Although high commodity prices have squeezed margins, we anticipate the company to maintain profitability since the company raised the prices of Frito-lay products and Gatorade drink in the last quarter. Last quarter, PepsiCo also announced it does not expect any significant impact of high commodity prices since the company was hedged against price volatility for the fourth quarter.

Soft Drinks Could Do a U-Turn in 2012

PepsiCo’s soft drink business including its namesake brand Pepsi, Mirinda and 7UP have witnessed declining volumes in the last few years. Indra Nooyi, Chief Executive of the company, has often been criticized for neglecting its core soft drink business and focusing excessively on building a healthier portfolio. Pepsi’s market share in the U.S. Carbonated Soft Drinks (CSD) market has been declining. Exacerbating the matters is the fact that the market size itself has shown a negative growth.

In the recent strategic review of the company, PepsiCo has decided to renew its push on the soft drink business with increased marketing spend. Indeed, in the soft drinks industry, we find a strong correlation of the sales with the amount of money spent of advertising. PepsiCo plans to raise the marketing budget of its namesake cola and other drinks by 50%, to a whopping $1.7 billion this year. ^[1] We could potentially see reinvigorated cola wars, one in which Pepsi might snatch some of Coca Cola’s market share.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. PepsiCo May Boost Marketing Budget to Take On Coca-Cola: Retail, January 30, 2012, Business Week [↩]