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Pepsi Performs Well in '15 as Americas Improve: Is it Enough?

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We issued an updated research report on PepsiCo, Inc.PEP on Oct 9, 2015.

On Oct 6, Pepsi beat the Zacks Consensus Estimate for both earnings and revenues in the third quarter of 2015 for the seventh time in a row. Earnings of $1.35 per share grew 14% on a constant currency basis driven by strong organic revenues and impressive margins. Organic revenues went up 7% backed by price hikes and improved volumes, mainly in North America.

Moreover, Pepsi raised the full-year earnings guidance for the second time this year encouraged by strong year-to-date performance and a positive outlook.

Despite the ongoing global macro challenges, Pepsi did well in 2014 and so far in 2015. The company's strong brand portfolio, product and geographic diversity, improved productivity, increased brand building investments and market execution, efforts to innovate and solid cash flow generation are the growth drivers.

We believe consumer focused innovation, brand building investments, better marketplace execution, pricing actions and productivity gains are expected to drive the food and beverage giant's results through the rest of 2015 and in 2016.

It is noteworthy that improving sales and profits in Pepsi's North American snacks and beverage business have been the primary reasons behind its strong performance so far this year supported by an improving economic environment.

However, Pepsi will continue to face macroeconomic headwinds in future quarters, mainly due to weakening international currencies and slowdown in some of the emerging economies.

Though there remains huge opportunity for sales growth in these countries, emerging markets have become increasingly volatile due to fluctuating currencies and other structural issues. The Middle East, Russia and Ukraine are witnessing continued political and civil unrest resulting in challenging operating conditions.

Further, developing/emerging countries like China, Brazil and Mexico are witnessing some economic slowdown. Deterioration in key emerging markets is leading to deceleration in personal consumption expenditures as well as industry growth which is lowering demand for the company's products. In Venezuela, the foreign exchange restrictions and other government regulations are hurting Pepsi's operations.

With around half of its revenues coming from outside the U.S., Pepsi's sales and profits are being affected by significant currency headwinds due to the recent weakening of many foreign currencies versus the U.S. dollar.

Moreover, Pepsi's carbonated soft drinks (CSD) have been seeing declining sales trends over the past few quarters due to category headwinds. Growing health and wellness consciousness - consumers are particularly vigilant about the use of artificial sweeteners, high sugar content and related obesity concerns - are hurting CSD demand and thereby the sales of Pepsi as well as other soft drink companies like The Coca-Cola Company KO and Dr Pepper Snapple Group, Inc. DPS .

Stock to Consider

Pepsi carries a Zacks Rank #3 (Hold). A better-ranked food stock is Primo Water Corporation PRMW with a Zacks Rank #2 (Buy).

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COCA COLA CO (KO): Free Stock Analysis Report

DR PEPPER SNAPL (DPS): Free Stock Analysis Report

PEPSICO INC (PEP): Free Stock Analysis Report

PRIMO WATER CP (PRMW): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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