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

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

Update PepsiCo (PEP)

Before the stock market opened today (February 11) PepsiCo (PEP) reported earnings of 90 cents a share for the fourth quarter of 2009. That was a penny below Wall Street projections but almost twice the 46 cents a share the company reported in the fourth quarter of 2008.

At $13.3 billion revenue came in just ahead of the analyst consensus of $13.26 billion. Sales grew by 4.5% in the quarter from the fourth quarter of 2008.

The performance of PepsiCo’s business units followed recent form.

Frito-Lay North America continued to gain market share for the full year in 2009. In the fourth quarter net revenue grew by 2% and core operating profit climbed by 4%.

The company’s traditional beverage business in North America continued to fight negative trends in its category. For the full year volume and net revenue fell by 6%. In the fourth quarter, while volume fell by 5%, net operating profit climbed by 10% thanks to improved productivity in North America and growth in operating profit in Latin America. In the fourth quarter the company saw improved performance for Gatorade and SoBe Lifewater.

The star, as usual, was the company’s international unit, which delivered a 17% jump in core operating profit. In the fourth quarter international revenue grew by 5% but operating profit fell by 3% as the company invested in infrastructure in the Asia, Middle East, and Africa division.

 For 2010 the company said it is targeting 11% to 13% constant currency growth in earnings per share for the company including the effects of its plans to acquire its two biggest bottlers, Pepsi Bottling Group (PBG) and PepsiAmericas (PAS). The company said it expects those acquisitions to close at the end of February. PepsiCo is projecting annual cost-savings from the acquisition of about $400 million once synergies are fully implemented in 2012. For 2010 those synergies will total about $125 million to $150 million, the company said.

 I don’t see anything here unexpected on either the up or downside. Read more