PepsiCo’s Ready To Redeem Its Flagging Soft Drink Business in 2012

PepsiCo (NYSE:PEP), which has long been criticized for neglecting its soft drinks and focusing excessively on building a healthy snacks portfolio, may finally see a turnaround in 2012 as the recent good news related to its soft drinks sales suggest. With initial sales of Pepsi Next better than expected and the company ready to spend an additional $600 million on advertisements in 2012, we could see a revival of its carbonated soft drink (CSD) sales. 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.

See our complete analysis of PepsiCo

Hope Alive for Pepsi Brand

PepsiCo struck two major deals in April. First, it signed an agreement with DineEquity, which owns Applebee’s as well as IHOP, where Pepsi will become the exclusive provider for the two restaurant chains. Currently, Pepsi is served in about 90% of Applebee’s restaurants and half of IHOP’s outlets. ^[1] The second deal saw PepsiCo signing a multi-year agreement with Family Dollar stores, according to which Pepsi will be sold in its 7,100 stores across America. Both these deals give the beverage a much needed boost. ^[2]

Coming to Pepsi Next, the initial sales data suggests that the mid-calorie soft drink’s performance has been better than anticipated, with the company claiming that the beverage is attracting new customers into the cola category. However, it is too early to comment as to how the beverage will perform in the long run. Initial sales can be misleading as consumers often buy products due to the hype surrounding them. ^[3]

Earlier this year, Pepsi tied up with Nicki Minaj, which will see the singer as brand ambassador for the drink. The first commercial is scheduled for launch next week as part of Pepsi’s global campaign ‘Live for Now’. ^[4] Although Pepsi has been consistently losing market share in the U.S. CSD market, we estimate this year could be different, and we expect Pepsi to maintain its market share.

2012 Guidance Reaffirmed

During the recent earnings call for Q1 results, PepsiCo reaffirmed its full year guidance of an EPS of $4.40, which is a drop of 5% over 2011. The management cited increased marketing spend as well as restructuring costs related to laying off 8,700 workers as reasons for the drop in EPS.

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

1. Coke versus PepsiCo: Cola wars are heating up again, economictimes.com, April30,2012 [↩]
2. Family Dollar Stores, Inc. Announces It Has Agreed In Terms To A Multi-Year Partnership With PepsiCo, Inc, reuters.com, April16,2012 [↩]
3. Pepsi NEXT lures new consumers into cola category as sales exceed expectations, foodnavigator-usa.com, April 27, 2012 [↩]
4. Nicki Minaj Pepsi Commercial To Debut Next Week, allhiphop.com, May 3, 2012 [↩]