We have maintained our Neutral rating on
) following appraisal of the first quarter 2012 results.
PepsiCo's first quarter 2012 earnings declined 7% year over year
to 69 cents per share as top-line growth was offset by commodity
inflation. However, earnings edged past the Zacks Consensus
Estimate of 67 cents. Revenues were up 4% in the quarter to $12.4
billion driven mainly by pricing benefits.
The Europe, Asia, Middle East and Africa (AMEA), and PepsiCo
Americas Foods divisions did well in the quarter. The company
maintained its previously provided 2012 guidance of core constant
currency earnings to decline by approximately 5%.
We are encouraged by the company's strong brand portfolio, its
product and geographic diversity and solid cash flow generation.
The company is the number two player in beverages globally and a
leader in macro snacks. It owns two of the three top health and
PepsiCo's overall product portfolio comprises 22 brands
including Pepsi, Mountain Dew, Gatorade, Tropicana, Lay's, Doritos,
Cheetos and Quaker Oats that generate more than $1 billion each in
annual retail sales. PepsiCo has the competitive advantage of
selling both snacks and beverages, which are complementary food
Product innovation plays a huge role in the company's success.
The company regularly creates new flavors of existing products as
well as maintains a robust pipeline of new products. The company
also supports its existing brands and categories with stepped-up
marketing and innovation.
In 2012, the company aims to double the contribution of new
products to total revenue in both snacks and beverages globally. In
fact, the company will increase its advertising and marketing
spending from 5.2% to 5.7% of revenue in 2012. The brand
investments are expected to boost revenue growth and also enable
increased price realization in the long run.
The company's operations in Russia, Mexico, Canada and the
United Kingdom contribute significantly to revenue and
profitability while its businesses in the emerging markets of China
and India hold significant growth opportunities. The company has
tripled its revenues from the emerging and developing markets in
the past five years. The economic outlook of these fast growing
nations is at present much better than the developed markets due to
an improving standard of living of the middle class.
PepsiCo's restructuring program, announced in February 2012, is
expected to result in in productivity savings of more than $1
billion in 2012 and $3 billion over the next three years. These
strategic initiatives are expected to help the company achieve its
long-term target of mid-single-digit constant currency net revenue
growth, core constant currency operating profit growth of 6-7%, and
high-single-digit core constant currency earnings growth.
However, a challenging consumer spending environment, sluggish
growth in the North American businesses and higher commodity costs
raise concern. Rising cost of raw materials is hurting the
company's margins. Input cost headwinds thus result in price
increases for the finished products, which may not always be
possible to pass on to the budget constrained consumer in this
Changing consumer preferences toward healthier drinks, as a
result of increasing health consciousness, are affecting the
company's carbonated soft drink (CSD) volumes. PepsiCo also faces
strong competition from
The Coca-Cola Company
). In the U.S. measured channels, The Coca-Cola Company commands a
larger share of CSD consumption. The Coca-Cola Company also enjoys
higher market share in many markets outside the United States than
COCA COLA CO (KO): Free Stock Analysis Report
PEPSICO INC (PEP): Free Stock Analysis Report
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