PepsiCo Earnings Preview: Company Is a Mirror of the Economy

When beverage/snack giant PepsiCo (PEP) reports its fourth-quarter earnings on Thursday morning, institutional investors will be hoping to see MOTS -- "more of the same."In addition to expecting an in-line quarterly earnings per share performance of 91 cents, investors want to see continued progress in emerging markets on both sales and market share for carbonated drinks (Pepsi, Mountain Dew, 7Up). They also expect modest revenue increases in developed markets from sports/health drinks, including the well-regarded Gatorade brand. Meanwhile, modest deterioration is expected in carbonated drink sales in developed markets.

Taking Emerging Markets' Pulse

Investors will also likely focus on Pepsi's comments on Asia and Latin American sales to help gauge both the strength of the economic recoveries in those key emerging market regions, and overall consumer confidence.

The Thomson/Reuters First Call Q4 earnings per share estimate for PepsiCo is 91 cents and the FY2010 earnings per share estimate is $3.71. Pepsi earned 88 cents per share a year ago, in Q4 2008. Thomson/Reuters First Call also expects PepsiCo to earn 79 cents and $4.16 per share in Q1 2010 and in FY2010, respectively. PepsiCo stock pays a dividend of $1.80 per year.

Concerning sports/health drinks, look for Pepsi to post only a slight quarterly, year-over-year sales increase for Gatorade, as the U.S. recession triggered budget belt-tightening by school athletic departments, teams, and the general public. Meanwhile, orange juice sales from its Tropicana unit should post a modest revenue increase in Q4.

Regarding snacks, a flat Q4 revenue performance for its Frito-Lay Brands unit (Doritos and Tostitos tortilla chips, Lay's potato chips) would likely be viewed as adequate by Wall Street, given the strong headwinds stemming from the pronounced U.S. recession. North American snack price hikes also weighed on sales during the first half of 2009: Hence, Pepsi's report and conference call comments will be scrutinized for any hints about shifts in pricing philosophy.

Concerning foods, strong sales gains are expected in its Quaker Foods North America operation (Quaker Oats oatmeal), as frugal U.S. consumers are thought to have eaten an increased percentage of breakfast meals at home.

Pepsi has also expressed its commitment to first lady Michelle Obama's initiative to reduce childhood obesity: The company has stated it will list calorie content on the front of its beverage containers, vending machines, and fountain equipment by the end of 2012.

Technically, Pepsi's stock has retreated roughly in sync with the Dow's late January/early February pull-back. Further, given PEP's impressive move higher in 2009, from about $43 to $64, the recent decline to around $60 looks like a healthy correction, and the long-term uptrend remains intact.

Joseph Lazzaro has no positions in stocks, but does own shares in two Pimco Bond Funds: PHDAX and PYMAX.
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