Pepsi's Stock Is All Fizzle

After Coca-Cola (NYSE: KO  ) delivered an earnings report that fired investors up earlier in the week, PepsiCo (NYSE: PEP  ) was unable to follow suit.

Core earnings per share for the quarter came in at $1.05 versus $1.04 expected by analysts. Revenue also topped estimates, growing to $18.2 billion versus Wall Street's expected $17.6 billion. But in a market where it's not about "what have you done for me lately" but "what will you do for me tomorrow," the company's 2011 guidance popped the fourth-quarter party balloons.

For any investor who's been following along with the rest of the earnings reports from consumer goods and food companies, it will be no surprise that PepsiCo sited commodity costs as a problem. We heard the same from Coke, we heard it from Procter & Gamble (NYSE: PG  ) and Sara Lee (NYSE: SLE  ) , and we heard it from McDonald's (NYSE: MCD  ) . With prices for commodities like grain, oil, and metals rising, a whole swath of goods is suddenly becoming more expensive to produce.

At PepsiCo, though, the impact seems to have been much more pronounced -- particularly when compared to Coke, which doesn't have a food and snacks arm. Commodity prices were a primary reason the company gave for slicing its growth outlook for 2011 from low double digits to 7% to 8%. Management also expressed concern that cost pressures would persist and said that longer-term profit growth would be in the high single digits.

Interestingly, investors gravitate toward companies such as PepsiCo -- or P&G and Coke for that matter -- precisely because they have pricing power and can better handle rising costs. However, this hasn't exactly been the case lately. For P&G and other consumer goods companies, the threat from private-label goods from the likes of Target (NYSE: TGT  ) and Kroger (NYSE: KR  ) make raising prices a dicey proposition. For the broader group, including PepsiCo, the continued weakness in the economy simply makes it easier to scare off customers with higher prices.

Still a buy?
Earlier this year, I called PepsiCo one of my top picks in the consumer sector for 2011. Admittedly, management's outlook gives me pause. However, as she was being grilled by analysts on the conference call, CEO Indra Nooyi quipped, "We look at our company and say, boy, if you could find other companies like ours, you should go ahead and invest in them." Particularly with shares trading at just 15 times 2010 core earnings, it's a point that's hard to argue, even with the lowered growth forecast.

I also like some of the moves that the company has been making lately. It paid a hefty price for a majority stake in Wimm-Bill-Dann, but the newly expanded footprint in Russia seems like a big positive. The buy also dovetails nicely with the company's increased focus on nutritious products -- or at least the appearance of more nutritional products -- which is a strategy I think is on the right track.

I'm definitely disappointed with what came to light in this report, but, for now at least, I'm still with Nooyi and am a fan of PepsiCo as an investment.

Want to keep up with what's going on at PepsiCo? Add it to your Foolish watchlist.

Coca-Cola is a Motley Fool Inside Value selection. Coca-Cola, PepsiCo, and Procter & Gamble are Motley Fool Income Investor selections. Motley Fool Options has recommended a diagonal call position on PepsiCo. The Fool owns shares of Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors.

Fool contributor Matt Koppenheffer owns shares of McDonald's, but does not own shares of any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or on his RSS feed. The Fool's disclosure policy prefers dividends over a sharp stick in the eye.


Read/Post Comments (5) | Recommend This Article (15)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On February 11, 2011, at 6:17 PM, wolfhounds wrote:

    I've held a big position in PEP in my retirement portfolio for years and don't plan to sell because of this news.

    How could you possibly be disappointed by the news in their earnings report. I'm certain most investors expected negative comments from management due to rising commodity costs. Whenever the economy does recover PEP will once again have pricing power, and a very large business expansion in Russia where it already had ten plants before the WBD purchase.

  • Report this Comment On February 11, 2011, at 10:58 PM, TMFKopp wrote:

    @wolfhounds

    "How could you possibly be disappointed by the news in their earnings report."

    That's easy, the company slashed its expected growth rate for 2011 and made it sound like increased expenses will continue to be an issue for a while.

    It's entirely possible to still be keen on PEP as an investment and still be honest about a disappointing report. And that's where I'm at. Like you, I think there are still some very positive drivers for PEP, but you just can't overlook the growth down-shift that management announced.

    Matt

  • Report this Comment On February 12, 2011, at 2:46 PM, newellsystems wrote:
  • Report this Comment On February 12, 2011, at 11:55 PM, wolfhounds wrote:

    @TMFKopp

    I think we're saying the same thing, but in different ways. Of course the earnings report and comments were disappointing, but it followed the same script of similar companies. I, for one, fully expected it.

  • Report this Comment On February 13, 2011, at 5:47 PM, slard271 wrote:

    "...sited commodity costs..." s/sited/cited/. :)

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