U.S. Markets closed

Can Pepsi (PEP) Continue its Strong First-Half Momentum?

Zacks Equity Research

On Aug 22, 2014, we issued an updated research report on PepsiCo, Inc. (PEP).

Pepsi began 2014 on a solid note beating the Zacks Consensus Estimate for both earnings and revenues in both the first and the second quarters.

Earnings of $1.32 increased 1% year over year in the second quarter driven by strong organic revenue gains and solid margins. Organic revenues increased 3.4% as improved beverage volumes, strong global snacks performance and sales gain in developing/emerging market offset a mild slowdown in Europe.

Despite higher commodity costs, core gross margins improved 60 basis points (bps) and operating margins expanded 10 bps as strong pricing, cost reductions and productivity gains offset headwinds from higher operating costs.

Moreover, the food and beverage giant raised its earnings guidance for the year based on its strong year-to-date performance and an optimistic outlook for the rest of the year. In 2014, Pepsi expects core constant currency earnings per share to increase 8% year over year, higher than 7% expected earlier.

We believe that Pepsi should continue the strong momentum in the second half of the year as well helped by strong snacks business, robust international growth and aggressive cost savings.

Overall, we are encouraged by Pepsi’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. Also, the company’s plan to substantially increase shareholders returns in 2014 and extend productivity initiatives is encouraging.

However, continued sluggish volumes in the North American beverage business concern us. The company’s North American beverage business has been consistently delivering soft results due to slowdown in the carbonated soft drinks (CSD) category. Growing health and wellness concerns, possible new taxes on sugar-sweetened beverages and growing regulatory pressures are affecting CSD sales of all major soft drink makers like The Coca-Cola Company (KO), Pepsi and Dr Pepper Snapple Group, Inc. (DPS).

Though some improvement was seen in the first half of 2014, a sustainable improvement is required.

Other Stocks to Consider

Pepsi carries a Zacks Rank #2 (Buy). Another beverage stock carrying the same Zacks Rank as Pepsi is The WhiteWave Foods Company (WWAV).

Read the Full Research Report on KO
Read the Full Research Report on DPS
Read the Full Research Report on PEP
Read the Full Research Report on WWAV

Zacks Investment Research