Has the PepsiCo turnaround begun?

The soft drink and snacks giant posts better than expected results.

By Jonathan Berr Jul 25, 2012 10:40AM

Shares of PepsiCo (PEP) rose some 1.2% in early trading Wednesday after the drinks and snacks company posted quarterly results that were less awful than Wall Street expected.


Net income at the Purchase, New York company fell to $1.49 billion, or 94 cents per share, versus $1.89 billion, or $1.17, a year earlier. Excluding one-time items, profit was $1.12 a share, beating the $1.09 average estimate of Wall Street analysts. Revenue fell 2.2% to $16.5 billion.


Under CEO Indra Nooyi, PepsiCo has revamped the management teams of it key businesses. The company also boosted marketing spending and raised prices in the wake escalating costs for commodities. The turnaround, which included axing 8,700 jobs, seems to be showing some results.

Among the highlights of the quarter were a 4% growth in PepsiCo Americas Foods , which includes Frito-Lay North America and Quaker Foods North America, helped by gains from convenience and dollar stores. Volumes for snacks rose 6%. However, there were plenty of ugly numbers too.


Operating profit at PepsiCo Americas Beverages plunged 15% to $840 million, reflecting higher commodity costs. Volumes at the business unit slumped 1%. Asia, Middle East and Africa saw dismal results as well, with profit down 45% to $165 million. Profit at PepsiCo Americas Foods slumped 3% to $1.26 billion. The future remains cloudy for the company. Indeed, Nooyi has called 2012 a "transition year."


Coca-Cola (KO), meanwhile, continues to enjoy a huge market share advantage over PepsiCo. The latest data from Beverage Digest show that the Atlanta-based company had a market share of 42% to PepsiCo's 29.3%. Shares of Coca-Cola have also outperformed PepsiCo's this year, gaining 9.8% to 4.8%. This is even more telling given that Coca-Cola recently reported an 18% gain in second quarter earnings, which was better than analysts expected. The overall macroeconomic environment for both companies isn't great.


For one thing, volumes for carbonated beverages have slumped for six straight years, and probably will continue to decline. Then there is the growing pressure from health advocates and some politicians to encourage people to drink less soda because it has no nutritional value whatsoever. If the economy continues to falter, it will be difficult for PepsiCo and other food companies to maintain profit margins, particularly if commodities prices continue to rise.


Wall Street still is skeptical about PepsiCo. The average 52-week price target for the stock is $72.38, about 4% above where it trades now. Nooyi will have to do more than produce mediocre results to win over the naysayers. And that won't be easy given the headwinds in the broader economy and the growing unease of many consumers about their financial futures.


Jonathan Berr does not own shares of the listed companies. Follow him on Twitter@jdberr





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