We maintained our Neutral recommendation on
) following appraisal of the second quarter 2012 results.
PepsiCo's second quarter 2012 earnings declined 7% year over
year to $1.12 per share hurt by a sluggish top line and currency
and commodity cost headwinds. However, earnings edged past the
Zacks Consensus Estimate of $1.09. Revenues declined 2% in the
quarter to $16.46 billion mainly due to currency headwinds and
re-franchising of the beverage business in China and Mexico.
Excluding these headwinds, organic revenue was up 5% helped mainly
by price increases. Read our full report at
PepsiCo Beats EPS; Misses Sales
We are encouraged by the company's strong brand portfolio, its
product and geographic diversity and solid cash flow generation.
The company is the second best player in beverages globally and a
leader in macro snacks. It owns two of the three top health and
wellness brands. PepsiCo's overall product portfolio comprises 22
brands including Pepsi, Mountain Dew, Gatorade, Tropicana, Lay's,
Doritos, Cheetos, and Quaker 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 fact, the company will increase its
advertising and marketing spending from 5.2% to 5.7% of revenue in
2012. With the increase in marketing investments, the company is
seeing improvement or stabilization in brand equity scores for
major brands in most markets. The higher brand equity scores will
translate to strong sales 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 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.
We believe PepsiCo's marketing support investments, brand
building innovation and cost saving efforts will boost growth.
However, we prefer to remain on the sidelines until we see some
meaningful impact of these investments on operating results.
Moreover, a challenging consumer spending environment, sluggish
growth in the North American businesses and higher commodity costs
raise concern. 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 carbonated soft drink (CSD) consumption. The
Coca-Cola Company also enjoys higher market share in many markets
outside the United States than PepsiCo.
COCA COLA CO (KO): Free Stock Analysis Report
PEPSICO INC (PEP): Free Stock Analysis Report
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