) began 2014 on a solid note like peer
The Coca-Cola Company
) which reported earlier this week. The food/beverage giant beat
the Zacks Consensus Estimate for both earnings and revenues as
snacks once again offset weakness in beverages. Pepsi's shares
rose 2% in
With the latest earnings beat, Pepsi has delivered four
straight positive earnings surprises with an average beat of
Pepsi's first-quarter 2014 core earnings per share of 81 cents
beat the Zacks Consensus Estimate of 75 cents by about 8.0%.
However, core earnings exclude a 2-cent gain from the sale of
assets in Europe. Including the gain, earnings stood at 83 cents,
up 7% year over year driven by strong organic revenue gains and
solid margins. Currency hurt the fourth-quarter earnings by 3.0%,
significantly lower than management's expectations of 6%. In
constant currency terms, adjusted earnings grew 10%.
Despite difficult consumer spending environment,
lower-than-expected currency headwinds, aggressive marketplace
investments, better execution, lower taxes and productivity gains
boosted profits in the quarter.
Core earnings exclude the impact of restructuring and
impairment charges and mark-to-market gains. Including these
factors, reported earnings per share were 79 cents, up 15.0% year
Top-Line and Volume Growth
Total sales in the quarter were flat year over year at $12.62
billion. However, structural changes, mainly beverage
re-franchising transaction in Vietnam, pulled down revenues by
0.5% in line with management's expectations. Foreign exchange
hurt revenue growth by 3.0%, lower than management's expectation
of 4%. Revenues also beat the Zacks Consensus Estimate of $12.47
billion by 1.2%.
Excluding these factors, revenues increased 4.0% on an organic
basis. Better volumes, strong snacks performance, improvement in
Europe and sales gain in developing/emerging market offset a
softer American beverage performance and weakness in Mexico.
PepsiCo witnessed an effective net pricing gain of 3% in the
quarter, lower than the past three quarters. Volumes increased 1%
in the quarter, slightly better than flat growth in the last
While organic snacks volumes grew 2%, beverages were flat in
Organic volume of the American snacks segment increased 1%,
slowing down from 3% seen last quarter. While volumes remained
strong in the Frito-Lay North America segment, it declined in the
Latin American snacks business due to weak revenues in Mexico.
Higher food and beverage taxes in Mexico hurt revenues in the
quarter. Organic snacks volumes grew 3% in Europe and 4% in
developing and emerging markets.
As regards beverages, while Pepsi's American and European
volumes improved, developing/emerging market volumes declined
from the last quarter.
Organic beverage volumes increased 3.0% in Europe but declined
1% in developing/emerging countries.
In the Americas, beverage volumes remained flat, though
improving sequentially. However, while non-carbonated beverages'
volume grew in the quarter, carbonated soft drinks (CSD) remained
a weak spot due to category headwinds.
Last month, Beverage Digest, a leading beverage industry
newsletter said that CSD volumes declined 3% in 2013 - the ninth
straight year of decline. The CSD category is suffering due to
growing health consciousness since consumers have become
particularly vigilant about the use of artificial sweeteners,
high sugar content and related obesity concerns. Among CSDs, the
cola segment particularly has come under fire as consumers are
opting for alternative beverage offerings. Also, possible new
taxes on sugar-sweetened beverages and growing regulatory
pressures are affecting CSD sales. These challenges have also
been felt by other major soft drink makers - The Coca-Cola
Dr Pepper Snapple Group, Inc.
) - leading to lower volumes and weak sales.
PepsiCo has increased marketing investments and is driving
package and product innovation to boost its American beverage
Core gross margins improved 40 basis points (bps) in the
quarter helped by effective revenue management strategies and
productivity gains. Core constant currency operating profit
(including gain on sale of European assets) improved 7.0% to
$1.87 billion in the quarter. Core operating margins grew 54 bps
as organic revenues growth and productivity gains offset
headwinds from higher operating and advertising/marketing
2014 Outlook Maintained
Management maintained its previously provided outlook for
2014. In 2014, Pepsi expects core constant currency earnings per
share to be approximately $4.50, representing an increase of 7%
from $4.37 reported in 2013. The target is in line with
management's long-term goal of high single-digit core constant
currency earnings growth.
Excluding headwinds from currency and structural changes,
organic revenues are expected to grow in the mid single-digit
range, also in line with the long-term targets.
Currency is expected to hurt 2014 earnings per share and
revenues by 4% and 3%, respectively.
Commodity inflation is expected in the low single-digit range
in 2014. Productivity savings are expected to amount to $1
billion in 2014, which will be used to offset headwinds from cost
inflation and thereafter, reinvest in the business. The core tax
rate is expected to be approximately 25% for 2014, slightly lower
than the 2013 level. Moreover, interest expenses are expected to
be higher than 2013 due to increased debt balances.
Also, management plans to increase cash returns to
shareholders in 2014 by 35% to $8.7 billion through significant
hikes in dividends and share repurchases.
Pepsi carries a Zacks Rank #3 (Hold).
A favorably-placed beverage company is
Monster Beverage Corporation
), which carries a Zacks Rank #2 (Buy).
DR PEPPER SNAPL (DPS): Free Stock Analysis
COCA COLA CO (KO): Free Stock Analysis Report
MONSTER BEVERAG (MNST): Free Stock Analysis
PEPSICO INC (PEP): Free Stock Analysis Report
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