Before the stock market opened on October 8, PepsiCo (PEP) reported third quarter earnings of $1.08 a share (5 cents above Wall Street projections) and revenue of $11.08 billion.
The earnings number was 5 cents a share above Wall Street earnings estimates, but the revenue number was $170 million light. Revenue indeed declined by 1.5% from the third quarter of 2008. Earnings were up just slightly from the $1.06 reported in the third quarter of 2008.
Two factors held down results.
First, the world may be emerging from recession but growth was still very low or even negative in the biggest parts of PepsiCo’s market (North America and Europe) for much of the quarter. Beverage volume fell by 6% in the Americas and snack volume was down 1% in Europe. Asia/Middle East/Africa revenue climbed 13% and operating profit was up 52% but volume in these market is still so much smaller than that in the company’s developed economy markets that this performance wasn’t enough to make up the difference.
Second, currency effects hurt revenue and earnings. PepsiCo said that in constant currency terms–correcting for changes in the exchange rates in the markets where the company does business–revenue would have been up by 5% (instead of down by  1.5%) and earning would have been up by 8%.
Going forward PepsiCo anticipates that currency effects will take a “mid-single digit” percentage bite out of earnings growth. In constant currency terms the company is looking for 11% to 13% earnings growth in 2010. (Those projections include cost-cutting achieved by PepsiCo’s acquisition of its two largest North American bottlers. PepsiCo said it expects that deal to close in the first half of 2010.)
So why did the stock tumble? Because it had climbed going into earnings and this is a sell on the news kind of market. PepsiCo disappointed momentum investors by merely affirming its previous guidance on earnings and revenue for the rest of 2009. Without new good news, they sold.
If’ you’ve been looking to get into PepsiCo, this drop is a good entry point. I’m not changing my current price target at all today. I raised the target price to $68 a share on October 2. I’m leaving it at that level.
I like RIG too. My price target is at least $120 which is based on a six year median EPS expected at end 2009 of $5.76. I think OFS is going to face revenue pressure as new vessel builds are completed in 2011-2013 at the same time limited resources will mean cost pressure continuing. But I have no doubt RIG can significantly raise its average cycle earnings. Over the period to 2014 I would look for at $165 on RIG with upside to $192 and a minimum price target of $120. I would keep an upper buy limit of $96 beyond which price it would not be prudent to add positions. My post on RIG is at http://maxkapital.blogspot.com/2009/07/racing-rig_27.html.
I like PEP too. Did a post on it on http://maxkapital.blogspot.com/2009/10/ode-to-pepsi.html. But I do not think I would be happy paying over $57 for it.
I second the request for ideas in Canadian markets.
Jim,
I am investing from Germany in Euros and between higher commissions and the declining dollar vs. the Euro it is wiping out most of the returns. As the dollar has fallen 10%+ and if the stock makes 10% with commissions it is a loss.
Australian and Canadian investments have been the only ones keeping pace. I am really interested in your Canadian portfolio ideas. I would appreciate if you could follow up on this. Read you daily.
Terry, $41 and change, which is where we are today. is a good price for adding to QCOM, I think.
On RIG, since I get a replacement value for RIG’s assets north of $140, I think it’s a fair bet that I’ll be hanging on and setting a new target.
terryw, you can be certain that I’m watching FLS for an entry point.I managed to pick up 50 shares during the last bottom in March but couldn’t find the confidence to do more. And now the stock has doubled. I think Flowserve is one of the best plays on water in the market. I just wish it would get cheap fofr just a week. But I’m not counting on it. There’s an interesting column idea there in what you do about a stock that never gets cheap.
About 4 or 5 months ago, Jim recommend Pepsi at $51/share, so I bought a modest 40 shares and followed his advice to set an exit price and be disciplined. I sold last week at $61.17 (I was shooting for 20%). Anyway, I think Jim’s insights are terrific and I’ve learned alot about ‘not being greedy’ and setting a target price and sticking with it.
Yes Jim,
Looking to see if I should hold onto RIG too. Standard and Poors projects it will get to $120.
Jim: Transocean Inc RIG got to over your target of $91. Are you planning to up the target?
Thanks Jim, ive been wanting to get into Pep for a while but scared of the high price. I will get some now.
Please inform us if you see a good entry point for FLS also. I been wanting to make a water play for a while.
And also if you think now is a good time to buy more QCOM