On Nov 20, we maintained a Neutral recommendation on the food and beverage giant, PepsiCo, Inc. (PEP), following mixed third-quarter results announced on Oct 16.
Why the Neutral Rating?
Pepsi’s third-quarter 2013 adjusted earnings of $1.24 per share beat the Zacks Consensus Estimate by 6% and year-ago earnings by 3.3%. Price increases, productivity gains and a lower tax rate offset headwinds from currency and aggressive marketplace investments. Total sales in the quarter fell shy of the Zacks Consensus Estimate by 0.5% despite a year-over-year improvement of 1.5%. Organic revenues increased 3.3% as higher pricing and strong snacks performance partially offset higher-than-expected currency headwinds and weaker growth in emerging markets.
Overall, we are encouraged by the company’s strong brand portfolio, its product and geographic diversity, improved productivity, increased brand building investments and market execution, innovation efforts and solid cash flow generation.
However, though margins were decent in the third quarter, incremental investments, an increased drag from forex, sequentially higher commodity costs and higher taxes and interest expenses are expected to pull down fourth-quarter profits.
Following the soft third-quarter results and the muted outlook for the fourth quarter, estimates mostly moved downwards over the past 60 days. The Zacks Consensus Estimate for the fourth quarter decreased 1.3% while that for 2014 decreased 0.4% over the same time frame.
Moreover, the company’s North American beverage business has been persistently delivering sluggish results, especially the colas. Changing consumer preferences, increasing health consciousness, rising obesity concerns, possible new taxes on sugar-sweetened beverages and growing regulatory pressures are affecting carbonated beverage sales of Pepsi as well as its rival The Coca-Cola Company (KO). Though Pepsi has increased marketing investments and is driving package and product innovation to boost its American beverage business, we prefer to wait until we see a substantial turnaround. The continuously challenged consumer spending environment is another negative factor.
Other Stocks to Consider
Pepsi carries a Zacks Rank #3 (Hold). Other beverage companies that are currently doing well include Coca-Cola Amatil Limited (CCLAY) and The WhiteWave Foods Company (WWAV). While Coca-Cola Amatil carries a Zacks Rank #1 (Strong Buy), WhiteWave Foods has a Zacks Rank #2 (Buy).