Costs Are Bubbling Up for Pepsi

The market liked PepsiCo's (NYSE: PEP  ) earnings report. Core earnings per share came in at $0.74 for the quarter, above the $0.73 that analysts estimated, and predictably, investors bid up shares.

The story behind those numbers is a bit more nuanced. It is also a little hard to pick apart because of the bottler acquisitions it completed early last year and the more recent acquisition of Wimm-Bill-Dann.

For the most part, the quarter looked good for Pepsi, with positive volume and revenue growth for most divisions and around the world. Snacks were a particular strength during the quarter with 2% growth in the mature North America market and faster growth in overseas markets -- including double-digit gains in India and China. Emerging markets in general were strong with snacks and beverages posting strong growth in Mexico, Argentina, Russia, Turkey, India, China, and the Middle East.

Less fizzy
As with prime beverage competitor Coca-Cola (NYSE: KO  ) , gains in flagship-brand soft drinks have been tougher to come by in North America, and despite strong gains from Mountain Dew, Sierra Mist, and Pepsi Max, soft drinks in the entire Americas region were flat with a year ago. However, noncarbonated drinks performed much better with an impressive 20% increase for Gatorade in North America.

As compared with the rest of the company, the Quaker Foods division looked sickly as both volume and revenue posted significant declines. Operating profit for the segment rose, but most of the gain was due to an accounting change.

That darn inflation
Finally, we can't have a discussion of a food, beverage, or consumer-products company without touching on rising commodity costs. The problem is everywhere -- Coke, Unilever (NYSE: UL  ) , Dr Pepper Snapple (NYSE: DPS  ) , McDonald's (NYSE: MCD  ) -- and it doesn't seem that anyone expects it to ease up any time soon.

In my coverage of Procter & Gamble's (NYSE: PG  ) quarter, I noted that all manufacturers -- branded goods and private label -- are facing rising costs, so it's not like Pepsi and its ilk are in a unique position. The moral of that story, though, is that investors will want to keep an eye on the next few quarters and specifically how sales and volume respond to price hikes aimed at offsetting the cost pressures. The results could be revealing as far as showing what kind of pricing power Pepsi really has.

Always a challenge, but still shining
There will always be challenges for a business to overcome, and Pepsi has its share right now -- most notably the cost pressures. However, this is still a great company with great brands, and it's posting strong growth around the world. The stock has a nice 2.8% dividend, and while I won't pound the table on the price, 15.5 times expected 2011 earnings isn't terrible for a quality company like this.

Coca-Cola is a Motley Fool Inside Value recommendation. Unilever is a Motley Fool Global Gains pick. Coca-Cola, McDonald's, PepsiCo, Procter & Gamble, and Unilever are Motley Fool Income Investor selections. Motley Fool Options has recommended a diagonal call position on PepsiCo. The Fool owns shares of Coca-Cola, and PepsiCo. 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 assures you no Wookiees were harmed in the making of this article.


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  • Report this Comment On May 01, 2011, at 5:01 AM, goalie37 wrote:

    Costs rising? Didn't the Ben Bernanke tell us we didn't have the inflation?

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