On Nov 20, we maintained a Neutral recommendation on the food
and beverage giant,
), following mixed third-quarter results announced on Oct 16.
Why the Neutral Rating?
Pepsi's third-quarter 2013 adjusted earnings of $1.24 per
share beat the Zacks Consensus Estimate by 6% and year-ago
earnings by 3.3%. Price increases, productivity gains and a lower
tax rate offset headwinds from currency and aggressive
marketplace investments. Total sales in the quarter fell shy of
the Zacks Consensus Estimate by 0.5% despite a year-over-year
improvement of 1.5%. Organic revenues increased 3.3% as higher
pricing and strong snacks performance partially offset
higher-than-expected currency headwinds and weaker growth in
Overall, we are encouraged by the company's strong brand
portfolio, its product and geographic diversity, improved
productivity, increased brand building investments and market
execution, innovation efforts and solid cash flow generation.
However, though margins were decent in the third quarter,
incremental investments, an increased drag from forex,
sequentially higher commodity costs and higher taxes and interest
expenses are expected to pull down fourth-quarter profits.
Following the soft third-quarter results and the muted outlook
for the fourth quarter, estimates mostly moved downwards over the
past 60 days. The Zacks Consensus Estimate for the fourth quarter
decreased 1.3% while that for 2014 decreased 0.4% over the same
Moreover, the company's North American beverage business has
been persistently 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 carbonated beverage sales of Pepsi as well as its rival
The Coca-Cola Company
). Though Pepsi 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 negative factor.
Other Stocks to Consider
Pepsi carries a Zacks Rank #3 (Hold). Other beverage companies
that are currently doing well include
Coca-Cola Amatil Limited
The WhiteWave Foods Company
). While Coca-Cola Amatil carries a Zacks Rank #1 (Strong Buy),
WhiteWave Foods has a Zacks Rank #2 (Buy).
COCA-COLA AMATI (CCLAY): Get Free Report
COCA COLA CO (KO): Free Stock Analysis Report
PEPSICO INC (PEP): Free Stock Analysis Report
WHITEWAVE FOODS (WWAV): Free Stock Analysis
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