No One Got It Right on PepsiCo

For the first time, PepsiCo's (NYSE: PEP  ) quarterly operating results include its recently acquired bottlers. And that's making a comparable performance analysis a tough thing to achieve.

In fact, during the first-quarter conference call, CEO Indra Nooyi told the cadre of Wall Street analysts listening in:

I know it is challenging to correctly model the impact of the bottling acquisition ... In fact I don't think anyone got it completely right ... The net of all this is that many aspects of our Q1 results did not come together the way some of you expected.

Umm, great, so how's the average investor supposed to make heads or tails of results?

Well, we'll do our best here, but I strongly suggest that shareholders carefully read through earnings materials themselves.

Net revenue of $9.37 billion represented a 13% year-over-year gain. Incidentally, that was shy of analyst estimates of $9.57 billion.

Reported earnings per share, meanwhile, gained 23%, to $0.89. Yet on a "core" basis -- which in this case excludes a dizzying array of items, including Venezuelan currency devaluation and acquisition-related charges -- EPS advanced by only 7%.

In terms of volume, the snacks category grew by 1%, while in the beverage business volume slipped by 0.5%. For comparison, rival Coca-Cola (NYSE: KO  ) enjoyed superior 3% volume growth in Q1.

In a thinly veiled reference to Coca-Cola, Nooyi eloquently explained that during the first eight weeks of the quarter, PepsiCo was "doing great" in the U.S. market, until "all of a sudden we see a competitor dropping their pants in the last couple of weeks when the volume is missing." Translation: Coca-Cola lowered prices to drive sales.

And that's the exact strategy that PepsiCo is not pursuing, according to the CEO. Rather, the company is trying to balance volume performance with its share of industry sales. The outcome, in the key Americas Beverages segment, was that volume declined 4%. And that includes a positive two percentage points of volume growth courtesy of a new distribution deal with Dr Pepper Snapple Group (NYSE: DPS  ) .

In fairness, PepsiCo reported that the segment is enjoying "improving top line trends in North America" and that the Gatorade G2 brand posted double-digit growth compared with the previous quarter. Furthermore, the company is slated to roll out G Series Pro in General Nutrition Centers and Dick's Sporting Goods (NYSE: DKS  ) locations.

Even so, part of the segment volume decline owes to PepsiCo "de-emphasizing" some less profitable juice and water products.

Ultimately, I do tend to believe management's assessment that 2010 is going to be a "first half/second half story," as acquisition-related efficiency begins to take effect.

And there's nothing off about that. Sometimes-competitor Kraft (NYSE: KFT  ) is poised to face similar complexities in reporting its results as it digests recently acquired Cadbury. However, for those who'd prefer a helping of clarity with their consumer-staples investment, I'd check out serial outperformer General Mills (NYSE: GIS  ) , which will get you some of the same category exposure without the number-crunching angst.

Coca-Cola and PepsiCo are Motley Fool Income Investor picks. Coca-Cola is an Inside Value recommendation. Motley Fool Options has recommended a roll your diagonal call position on PepsiCo. Try any of our Foolish newsletters free for 30 days.

Fool contributor Mike Pienciak holds no financial interest in any company mentioned in this article. The Fool has a disclosure policy.


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