We maintained our Neutral recommendation on
) following appraisal of the third quarter 2012 results.
PepsiCo's sluggish top line and currency headwinds dragged the
company's third quarter 2012 earnings per share down by 8% from
prior-year quarter to $1.20. However, earnings edged past the
Zacks Consensus Estimate of $1.16. Revenues declined 5% to $16.7
billion in the quarter mainly due to currency headwinds and
re-franchising of the beverage business in China and Mexico.
Excluding these headwinds, organic revenue was up 5% primarily
banking on price increases. Read our full report at
PepsiCo Posts Mixed 3Q, Keeps View
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, which generate more than $1 billion
each in annual retail sales. PepsiCo enjoys competitive advantage
of selling both snacks and beverages, which are complementary
Product innovation plays a huge role in the company's success.
Innovation currently contributes approximately 8% of net revenues
for PepsiCo. 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 presently much better than the developed
markets due to an improving standard of living of the middle
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 by 2015. 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
We believe PepsiCo's marketing investments, brand building,
innovation and cost-saving efforts will boost growth. PepsiCo has
encouraging plans to reinvest any excess earnings to support
these initiatives, especially in the U.S. 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 and
higher commodity costs raise concern. PepsiCo also faces strong
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 than PepsiCo in
many markets outside the U.S.
COCA COLA CO (KO): Free Stock Analysis Report
PEPSICO INC (PEP): Free Stock Analysis Report
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