PepsiCo Shares Bubble Up to a New High

Going strictly by its stock chart, PepsiCo (PEP) is on top of the world. The soft drink and salty snacks giant opened at a new high on Thursday after posting better-than-expected quarterly results.

Revenue may have climbed just 2 percent to $17.2 billion, but core earnings per share improved 10 percent to $1.36, slightly exceeding analyst expectations. Most of the improvement is clearly taking place way down on the income statement. Triggering a lower effective tax rate and buying back shares are helping prop up bottom-line results, but PepsiCo has also made its own luck through $1 billion in productivity savings this year.

However, despite all the cheering on Wall Street about a 3 percent uptick in organic revenue and PepsiCo beating Wall Street profit forecasts once again, things aren't perfect. The beverage giant's flagship soda business is in trouble.

Pop Life

There are plenty of moving parts at PepsiCo. Beyond soft drinks, this is the company behind Gatorade, Frito-Lay snacks, Tropicana juices and Quaker oatmeal. That diversity is serving PepsiCo well, because its soda business is in a funk.

Carbonated soft drink sales volume declined 1.5 percent at PepsiCo in North America in its latest quarter relative to last year's third quarter. That's not a fluke: North American soda sales volume took a 2 percent year-over-year hit during the previous quarter. Folks just aren't chugging sodas the way they used to, and that's resulting in sluggish performance at PepsiCo and its arch-rival Coca-Cola (KO).

Beverage Digest reports that overall soda volumes have fallen for nine consecutive years, but the momentum is starting to intensify. After volume slid 1.2 percent in 2012, the pace accelerated for a 3 percent drop in 2013.

Diet sodas had been holding up well despite the wider trend, but even that segment has started to crumble as consumers grow wary about the potential health impacts of artificial sweeteners. Diet soft drinks have suffered through three years of declines, and last year they fell even harder than non-diet carbonated beverages.

Catching Lightning in a Bottle

The defection is even more pronounced at the home-crafted level, where SodaStream (SODA) has seen stateside sales sputter since late last year. The company whose signature machine turns water into flavored soda was a market darling until it took a dramatic downturn in popularity during the 2013 holiday shopping season.

Yes, Starbucks (SBUX) entered the carbonated beverage market earlier this year with its three handmade-in-store sodas. In a few months, Keurig Green Mountain (GMCR) will be rolling out a Keurig Cold machine that makes carbonated beverages. That these two java heavies are moving into soda may seem at first glance to be validation of the business's potential upside, but ultimately, the moves are more about their own diversification efforts as they hope to carve out slices of a shrinking pie.

In other words, an already challenging situation is about to get more so. PepsiCo could respond by rolling out new flavors, packaging, and nutritional profiles, but investors may as well consider themselves fortunate that PepsiCo decided long ago to broaden its reach into performance beverages, oatmeal, fruit juices and salty snacks.

Motley Fool contributor Rick Munarriz owns shares of Keurig Green Mountain and SodaStream. The Motley Fool recommends Coca-Cola, Keurig Green Mountain, PepsiCo, SodaStream and Starbucks. The Motley Fool owns shares of PepsiCo, SodaStream and Starbucks and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. To read about our favorite high-yielding dividend stocks for any investor, check out our free report.