) drive towards emerging markets gained momentum in the last few
months of 2012, and we expect this to translate into improved
organic sales growth for the company when it releases its Q4 2012
results on February 13. The growth in emerging markets should help
the company fight off the economic headwinds that have prevailed
over the course of 2012. The company witnessed decline in
soda consumption in developed economies and decline in the bottom
line as the company incurs incremental costs due to restructuring
and productivity improvement plans.
See full analysis for PepsiCo
Snacks To Lead Growth
PepsiCo's s snacks division, which operates through brands such
as Lay's and Quaker's, has been performing well in recent years -
maintaining and growing its market share in both developed and
In developed markets, the company has been focusing on a shift
towards healthier snacks, relying largely on new gluten-free and
low fat products to drive sales. PepsiCo is also focused on
diversifying its pricing mix in developed economies with new
products being launched in both the premium and low-priced segment.
This is helping the company access a broader range of
Meanwhile, PepsiCo's attempts at experimenting with local tastes
and preferences has helped it gain ground in emerging markets
despite stiff competition from local players. The company has been
raising the stakes in key regions such as India and China over the
third quarter, with a wide spectrum of investments, from
establishing new R&D facilities
sponsoring major sporting events
The company's strong performance in the snack division is
highlighted by the the top line growth of Pepsi America Foods,
which includes snacks sales in North and Latin America. Over the
first nine months of 2012, sales in the segment stood at $16.3
billion, 4% higher than the previous year's. We expect the coming
results to continue this rising trend.
Beverages To Battle Flagging Demand And Increasing
On the other hand, PepsiCo's performance in the beverages
department over 2012, has largely been a disappointment for
investors. The company's performance in the segment was largely
hampered by declining consumption of carbonated beverages in
developed economies. For example, the sales volumes of soda drinks
in the U.S. dipped in 2012, by as much as 1.8% over the last year.
With fewer dollars to chase in the traditional soda market,
competition is heating up between the cola majors and competitors
such as Dr Pepper Snapple (
) and Coca-Cola (
) have been edging PepsiCo in the recent past. PepsiCo responded in
its traditional way to this threat focusing on stronger pricing
while playing the marketing card through the company's Superbowl
sponsorship and its 'Live For Now' campaign, also highlighting a
$600 million dollar bump in company-wide marketing spend.
Meanwhile, in international markets, the company is trying hard
to snatch market share from Coca-Cola, which continues to dominate
most emerging markets. PepsiCo's partnership with Chinese beverage
company Tingyi is helping it scale up operations in China and with
the integration successfully completed in mid-2012, we should see
more sales coming in from the region in the final few months.
However, we expect PepsiCo's beverage performance to remain tepid
over the fourth quarter with Coca-Cola continuing to remain the
Bottom Line To Face Further Pressure
PepsiCo was in a transition through much 2012, with operational
changes such as the Tingyi deal and exit from Mexican bottling
operations, leading to increased reintegration and restructuring
costs. The company is also expected to incur upwards of $200
million in costs as part of its 'productivity plan' put in place
during 2012. Moreover, the company has also pumped up its
advertising focus in recent months. All these factors should take a
significant toll on the company's operating margins over Q4.
Investors, however, should look forward to higher gross margins
for Q4 2012, compared to the same period in 2011. With the
commodity cost environment easing towards the end of 2012, PepsiCo
should realize lower cost of raw materials for the final quarter.
This change was also largely evident during Q3 2012, when lower
commodity prices and stronger pricing helped PepsiCo realize gross
margins of 53.0%, compared to 51.9% in Q3 2011.
We currently have a price estimate of $79 for PepsiCo, which is
about 9% higher than the current market price.
How a Company's Products Impact its Stock Price at