On May 21, we maintained a Neutral recommendation on the food
and beverage giant,
) on the back of solid first-quarter 2013 results. However,
sluggishness in the American beverage business is a concern.
Why the Neutral Recommendation?
PepsiCo's first-quarter earnings of 77 cents beat both the
Zacks Consensus Estimate as well as the year-ago results driven
by productivity gains from restructuring activities, strong
margins as well as solid organic top-line growth. Organic
revenues increased 4.4% driven largely by strong performance of
snacks and encouraging international growth. PepsiCo is boosting
its existing brands and categories with stepped-up marketing and
innovations which is driving organic revenue growth and market
share gains. The company also retained its 2013 outlook.
Following the solid first-quarter results, the estimate
revisions were mostly biased upwards. The Zacks Consensus
Estimate for 2013 rose 0.5% to $4.41 per share while that for
2014 increased 0.2% to $4.79 over the last 60 days. In fact,
PepsiCo has beaten the Zacks Consensus Estimate continuously for
the past four quarters.
Overall, we are encouraged by the company's strong brand
portfolio, its product and geographic diversity and solid cash
flow generation. Year 2012 was a turning point for PepsiCo. In
this year the company increased its investments in brand
building, market execution and innovation, improved productivity
and efficiency, and drove significant cash flow generation. All
these initiatives will not only intensify its foundation for
further growth but also give the company a competitive advantage
over its peers.
However, we prefer to remain on the sidelines until we see
some meaningful impact of these investments on the operating
results. Moreover, the company's North American beverage business
has been consistently delivering sluggish results, especially the
colas. Changing consumer preferences, increasing health
consciousness, rising obesity concerns, possible new taxes on
sugar-sweetened beverages and growing regulatory pressures are
affecting the company's carbonated beverage sales. Though PepsiCo
has increased marketing investments and is driving package and
product innovation to boost its American beverage business, we
prefer to wait until we see a substantial turnaround. The
continuously challenged consumer spending environment is another
PepsiCo currently carries a Zacks Rank #3 (Hold). Rival,
The Coca-Cola Company
), carries a Zacks Rank #2 (Buy). Other consumer staples
companies that are currently doing well include
Flower Foods, Inc.
), carrying a Zacks Rank #1 (Buy) and
General Mills, Inc.
), carrying a Zacks Rank #2 (Buy).
FLOWERS FOODS (FLO): Free Stock Analysis
GENL MILLS (GIS): Free Stock Analysis Report
COCA COLA CO (KO): Free Stock Analysis Report
PEPSICO INC (PEP): Free Stock Analysis Report
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