PepsiCo Earnings Preview: On a Quest to Conquer the Snack World


PepsiCo (PEP), the beverage and food giant, will announce its second-quarter numbers on Tuesday, and analysts expect it to report earnings per share of $1.07 to $1.10, up from $1.02 a year earlier.

If the numbers they anticipate are correct, it will mark a continuation of the company's stable period of success. However, that doesn't mean that PepsiCo management is standing pat. Having been effective in the regions where it has previously focused, PepsiCo is looking to expand into new markets.

Critics repeatedly argue that Pepsi's prospects are limited because of its constant competition with Coca-Cola (KO), the clear leader in the soda business. This is a valid point: Coca-Cola has one of the strongest brands on the planet. But Pepsi's strength lies in its diversification.

Not Just Soda

PepsiCo's revenues are buoyed by its snack business, which accounts for 46% of its profits in North America. Its many brands, including Frito Lay, Gatorade, Quaker, Tropicana and Doritos, hold a massive portion of the snack sector in both the U.S. and Western Europe, with a nearly 40% and 23% share of the market in the two areas, respectively.

Despite those large market segments, there's room for PepsiCo to grow in all of its areas of business, particularly by expanding in emerging markets. Pepsi products can be found in almost 200 countries, but the brand isn't strong in every one. As developing countries continue to increase their embrace of Western brands, Pepsi has the opportunity to acquire a great number of willing, untapped customers.

In places where it has a foothold already, PepsiCo has been working to increase its appeal by introducing new products and improving existing lines. It has, for example, been working with Starbucks (SBUX) to create ready-to-drink coffee beverages. By tweaking packaging sizes and designs, it hopes to appeal to more consumers and increase margins at the same time.

Health-Targeted Taxes Would Be Unhealthy for PepsiCo

While its brands are strong, some uncertainty surrounds Pepsi's future. In the U.S., a federal initiative to reduce the nation's high levels of childhood obesity could hurt Pepsi's profits. In particular, proposals to tax certain unhealthy foods, sugary sodas in particular, could strike directly at the bottom line. While no such legislation has gotten off the ground in Congress, and local proposals have mostly failed to make much headway, it's possible that a soda tax could find support.

Furthermore, commodity prices could swing in ways detrimental to Pepsi. It uses vast amounts of corn and sugar to make its products, and spikes in their prices would be felt immediately. In addition, Pepsi's recently acquired bottlers would see their profits shrink if energy prices were to increase sharply.

Still, those risks are not enough derail analysts' expectations for PepsiCo. As the strongest player in the snack industry and combining with Coca Cola to capture 70% of the American beverage market, it is in a position of power. PepsiCo should encounter few problems in its quest to become even more of a worldwide staple.