Snacks Carry Pepsi’s Stock To $69 As Beverages Limp Along

PepsiCo (NYSE:PEP) announced its earnings on Thursday. Total revenues grew 4% to $12.4 billion helped by strong top-line growth in Frito-Lay North America and APMEA (Asia Pacific, Middle East and Africa) and positive impact of acquisition of Wimm-Bill-Dann (WBD). Net income remained flat at $1.13 billion. PepsiCo reaffirmed its full year guidance of a 5 percent drop in EPS to $4.40. 2012 is seen as a transformation year for PepsiCo as the company steps up its focus on soft drinks and lays off 8700 workers as part of its cost cutting program. PepsiCo competes with leading food & beverage companies around the world including Kraft Foods (NYSE:KFT), Coca-Cola Co (NYSE:KO) and Dr Pepper Snapple (NYSE:DPS).

We maintain a price estimate of $69, which is about 5% above the current market price.

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Company-wide gross margins declined 180 basis points to 52.6% on a y-o-y basis as the company struggles with rising commodity costs. However, the margins are similar to those for 2011 (full year) so we expect the margins will be sustainable in 2012 as well.

Soft Drink Volumes Decline

Carbonated Soft Drink (CSD) volumes declined 4% in spite of PepsiCo’s plans to spend an additional $600 million in 2012 on marketing with a greater focus on soft drinks. However, it is still relatively early in the year and often there is a reaction time needed for the move to make an impact. We anticipate Pepsi will be able to maintain its market share in the U.S. CSD market since there is a strong correlation between the advertising budget and soft drink sales.

Frito-Lay Rightly the Most Valuable Division

Frito-Lay North American (FLNA) revenues increased by 4.5% to $3.0 billion y-o-y. Volume declined 2% which was more than positively offset by a 6% gain in pricing. The company reported operating profit rose 2% to $788 million. Similarly, Latin American Foods (LAF) revenues jumped 11% to $1.23 billion reflecting the acquisitions made in Brazil and Germany.

Volumes for the segment rose by 15%. With the help of acquisitions in developing nations and new product introductions, Frito-Lay’s market share in the international snacks market has been gradually creeping higher. Frito-Lay contributes more than 35% to the stock price as per our estimates.

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