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.