PepsiCo starts earnings season with a thud

Oh, no PepsiCo!

This isn’t the way to start off third-quarter earnings season.

Before the New York Stock Exchange opened this morning, October 7, PepsiCo (PEP) reported third quarter earnings of $1.22 a share, exactly matching the Wall Street analyst consensus. Revenue came in at $15.51 billion, slightly above the consensus projection of $15.38 billion.

But the stock was down 3.2% as of 3:00 ET.

Why? Read more

Disturbing background for the third quarter earnings season that starts this week raises the odds for a dip on earnings news over the next few weeks.

Wall Street analysts cut their estimates for 2011 earnings for the companies in the Standard & Poor’s 500 in September, according to Bloomberg. That’s the first decline in quarterly earnings estimates since June 2009.

The reduction isn’t big—the estimate for 2011 earnings declined to $95.17 in September from a high of $96.16 in August—but the shift in direction is likely to increase uncertainty and worry just as third quarter earnings season starts with announcements from PepsiCo (PEP) and Alcoa (AA) today, October 7. (PepsiCo reported earnings of $1.22 a share for the third quarter before the market opened today. That matched the consensus analyst estimate. Revenue came in slightly above consensus of $15.38 billion at $15.51 billion. But shares were down 3.4% as of 12:30 ET today because the company lowered guidance for the full year to $4.08-$4.12. Wall Street consensus had been at $4.17 for 2010.)

After an 8.8% gain on the S&P 500 index in September, investors will be looking for reasons this earnings season to take profits or to hang on in anticipation that the rally will continue. Disappointing guidance for 2011—if in their post-earnings remarks CEOs take the same direction as analysts—will certainly push the balance toward profit taking.

Especially since it looks like the quarter to quarter pattern is pointing in the same direction of slower earnings growth. Read more

Sell PepsiCo (PEP)

Shares of PepsiCo (PEP) are inching toward my June target of $68 so slowly that I think it’s time to sell and look for someplace to redeploy the money. With sales of sugared soft drinks stagnant in North America and with PepsiCo announcing that’s it’s going to try to grow sales of its “good for you” products in brands such as Tropicana and Tazo, I think investors are looking at a period of slow growth as the company lays foundations for future growth. (For more on those challenges see my post http://jubakpicks.com/2010/03/01/do-the-new-coke-and-the-new-pepsico-both-fail-the-taste-test/ ) Read more

Update PepsiCo (PEP)

On Monday, March 15, 2010, the board of directors at PepsiCo (PEP) announced that the company would raise its dividend by 7% to an annual $1.92 a share from the current $1.80. At the 11:30 price of $65.75 that comes to a yield of 2.9%. The company’s next quarterly dividend will be paid on June 30 to shareholders of record as of June 4.

The company also moved to return cash to shareholders by increasing its buyback of outstanding shares. Read more

Do the new Coke and the new PepsiCo both fail the taste test?

Gee, I really hate this deal.

It’s not just that I question the price that Coca-Cola (KO) is paying to acquire the North American operations of its biggest bottler Coca-Cola Enterprises (CCE). The $12.7 billion price works out to about the same multiple that PepsiCo (PEP) paid to acquire its two biggest bottlers. After the deals both close Coke will have control of about 90% of its North American bottling and distribution system; Pepsi will control about 80%. But while the companies are paying about the same price PepsiCo looks like it has a much bigger opportunity to cut costs in its deal than Coke does.

Or that the deal takes away a major reason to own shares of Coca-Cola. Wall Street preferred Coke to Pepsi because it saw Coke as the better emerging markets play. But this deal will take Coke’s revenue from 74% overseas to 54% overseas, according to Barclays Capital.

Or even what the deal says about the declining market for soft-drinks in North America. And the shift in power toward big box stores such as Wal-Mart (WMT.) First, U.S. sales volume of carbonated drinks is down across the industry according to Beverage Digest. Sales volume fell in 2009 following a 3% decline in 2008, a 2.3% drop in 2007, and a 0.6% falling 2006. At the same time, the increasing market power of big box retailers has put pressure on soft drink margins and cut into the shelf-space that Coke and Pepsi get for their bottled waters and the other non-carbonated drinks that they’re counting on to make up for the drop in carbonated soft-drink sales volumes.

No, what really troubles me is that this deal has history, you see. And the history is one of asset-shuffling and accounting razzle-dazzle. If these companies’s are willing to forgo the financial magic that the deals brought them in 1986 and 1999, respectively, then the long-term challenges facing these companies are more serious than I thought. (For more about the implications of the current wave of deals see my post http://jubakpicks.com/2010/02/26/can-ceos-destroy-shareholder-value-in-an-acquisition-just-watch-them/ ) Read more