Pepsi’s Reports Solid Growth but Flags Inflation Concerns

by Trefis Team
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PepsiCo (NYSE:PEP) released results this morning. The company reported 5% increase in net revenues year over year and reiterated its earnings growth target to 7%-8% for 2011 owing to rising commodity costs and slower-than-expected economic recovery. However the company signaled that inflation pressures persist and that it will look to some price increases to offset this. [1] [2]

Both PepsiCo and rival Coca-Cola (NYSE:KO) are focusing efforts in developing nations like India and China where volume growth has been much higher than developed markets like the U.S. We expect PepsiCo’s carbonated soft drink (CSD) market share in the U.S. will decline slightly to 9.5% by the end our forecast period. Trefis members however predict the share will rise in the coming years and then decline gradually reaching 10.4%. The member estimates imply no material impact on PepsiCo’s stock, since the Pepsi brand accounts for only 7% of the stock price by our analysis.

We currently have a Trefis price estimate of $68.53 for PepsiCo’s stock, about 2% above the current market price of $67.11.

Rising Commodity Costs Could Impact Outlook

PepsiCo had earlier forecast $1.4-$1.6 billion (8%-9.5%) in commodity inflation costs for 2011. [3] The company’s ability to pass on the costs to end consumers could be limited since the unemployment level is still lingering close to double digit levels and consumer spending hasn’t fully reached pre-recession levels.

PepsiCo’s acquisition of bottlers last year is also not helping the cause. According to Moringstar, Pepsi has become more exposed to commodity costs after the acquisition of low margin bottlers. [4] However, a recent Fitch report argues that commodity cost headwinds will hot have a significant impact on the margins of PepsiCo and Coca-Cola. The credit rating company expects $450 million in commodity costs increases for the North American bottling operations of both beverage companies, and an operating margin impact of less than 110 and 90 basis points for Coca-Cola and PepsiCo, respectively. [5] But overall rising commodity costs will definitely be the biggest concern for the company.

Focus on Emerging Markets to Continue

PepsiCo’s sales in North American market has been weak compared to growing sales in emerging markets like Russia, India and China, prompting the firm to make investments in these countries. In May 2010, PepsiCo announced plans to invest $2.5 billion in China over the next years mainly to compete against rival Coca-Cola. [6]

Our complete analysis for PepsiCo’s stock is here.

  1. PepsiCo Q4 2010 Results, Press Release, Feb 10, 2011 []
  2. PepsiCo Q1 2011 Results, Press Release, Apr 28, 2011 []
  3. PepsiCo, Citing Rising Commodity Costs, Posts a Drop in Profit, NYtimes, Feb 10, 2011 []
  4. Pepsi Achieves Broad Growth in 4Q, but Focus Now on Margins; Stock Offers Upside, Morningstar, Feb 10, 2011 []
  5. Fitch: U.S. Beverage Credit Profiles Steady in Commodity Cost Headwinds, Press Release, March 17, 2011 []
  6. Pepsi Battles Coke in China, WSJ, May 22, 2010 []
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