Foolish Forecast: Pop Math Quiz for Pepsi

Pop 'n' chips powerhouse PepsiCo (NYSE: PEP) reports fourth-quarter and full-year 2007 earnings tomorrow morning. Want to know what Wall Street expects to see? Read on. Want to know what really matters? Read on a bit more.

What analysts say:

• Buy, sell, or waffle? Thirteen analysts are bullish, while four are sitting on a hold. The Fool's CAPS community offers Pepsi a five-star rating, its best possible.
• Revenue. They're looking for 11% quarterly sales growth to $11.56 billion.
• Earnings. Profits are expected to grow a bit slower, up 10% to $0.79 per share.

What management says:
You've got to give Pepsi props for consistency. Two quarters back, Pepsi was predicting it would earn "at least $3.35 per share" in fiscal 2007, while generating about $4.4 billion in free cash flow. Last quarter, management stuck with that guidance. In November, Pepsi reaffirmed. So I guess we should triple-dare these guys to miss their numbers tomorrow.

What management does:
Despite seeing rising commodities costs cut into its gross margins in every quarter for the past 18 months, Pepsi is doing a fine job of protecting its bottom line. By holding operating costs to just a 10% year-over-year rise for the last six months (slower than sales growth), Pepsi has mitigated the effects of gross margin erosion. It continues to squeeze more and more pennies from each new dollar added to its steadily growing revenue stream.

Operating margins look pretty stable in the mid-18s, still lagging Coca-Cola (NYSE: KO) and Hansen Natural (Nasdaq: HANS) , but still beating Cadbury-Schweppes (NYSE: CSG), Kraft (NYSE: KFT), and Jones Soda (Nasdaq: JSDA) by comfortable, um, margins.

Margins	6/06	9/06	12/06	3/07	6/07	9/07
Gross	56.1%	55.5%	55.1%	55%	54.8%	54.7%
Operating	18.2%	18.3%	18.3%	18.5%	18.4%	18.5%
Net	12.7%	14.2%	16.1%	16.2%	16.3%	16.5%

All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.

One Fool says:
So what's not to like about Pepsi? In a word: valuation. Yes, still.

Even if you believe Pepsi's promise to deliver $4.4 billion in free cash flow this year, you're still looking at a stock selling for 25 times that number. That seems an awfully steep price to pay for a firm that most analysts expect to average less than 11% growth per year over the next half decade.

What did we expect when we popped the top on Pepsi last quarter, and what did we get? Find out in:

• Foolish Forecast: Pepsi's All Shook Up
• Pepsi Loses Some Fizz