No Pep in Pepsi's Step

Enough already! If you've been breathing during this earnings season, you've heard the big names like Coca-Cola (NYSE: KO  ) , Johnson & Johnson (NYSE: JNJ  ) , and Philip Morris International (NYSE: PM  ) drone on about how currency has affected their results.

For the record, PepsiCo (NYSE: PEP  ) is right there with the rest of the six-pack when it comes to fizzling dollar-based results. But global currency is just one factor in the popping of PepsiCo's carbonated bubble.

On a volume basis, the global snack business grew by 1%, while the beverage business dropped by 1%. Pepsi Americas' beverage business (which contributes almost 25% of total corporate revenue) declined by 6% in volume, with a 9.2% drop in operating profit.

But Pepsi Americas' food volume increased by 1%, with a corresponding growth in operating profit of 3.9%. Europe and Asia/Middle East/Africa beverage volume increased by 2% and 8%, respectively, while the snack businesses in each location had a respective 1% decline and 3% jump.

In the end, though, it's all about the Benjamins. Overall revenue dropped by 3.2%, and net income fell by 2.2%. To compare the big dogs of the cola industry, Coca-Cola's quarterly revenue dropped by 9%, and earnings also declined by 9% when adjusted for previous charges. So PepsiCo's results weren't completely cataclysmic. Pepsi stated that without negative currency impacts, EPS growth would have been 8%; looking ahead, Pepsi predicts a 6% currency impact on its full-year earnings.

Coca-Cola does have more global exposure than PepsiCo, with about 26% of its revenue attributed to American operations. In contrast, Pepsi Americas' food and beverage revenue -- which does include South/Latin America -- contributes 71%. And with a great deal of PepsiCo's business tied into food (as opposed to purely beverages), the companies aren't completely comparable anyway.

The continued decline in beverage products seems most worrisome for PepsiCo. Gatorade – or what the cool kids are calling "G" – is PepsiCo's second-largest beverage (by volume) after the flagship Pepsi brand, and it's in the middle of a major rebranding campaign. In the midst of these efforts, Beverage Digest is estimating that Gatorade volume has dropped 17.5%, and market share declined 4.5% in the first half of the year. Some folks are confused by the new "G" marketing program, while others are simply choosing not to buy these products on impulse.

The carbonated soft-drink segment as a whole is also hurting, with volume declining 3% last year. Coca-Cola's segment share dropped by 0.1%, and PepsiCo's share was off 0.3%. In contrast, Dr Pepper Snapple (NYSE: DPS  ) actually edged up by 0.3%.

At a price-to-earnings ratio of 17, versus Coca's Cola's P/E of 18, Pepsi's cheaper right now, but neither company is serving up the real thing when it comes to long-term investment prospects.

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PepsiCo, Johnson & Johnson, and Coca-Cola are Motley Fool Income Investor selections. Coca-Cola is also an Inside Value selection. Philip Morris International is a Global Gains recommendation. Try any of our Foolish newsletters today, free for 30 days.

Fool contributor Colleen Paulson does not hold positions in companies mentioned above. The Fool's disclosure policy will have a nice, cold glass of milk, thanks..


Read/Post Comments (4) | Recommend This Article (5)

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 July 24, 2009, at 3:29 PM, Varchild2008 wrote:

    Hence why on DPS's IPO day I was a proud advocate of Dr. Pepper Snapple Group and a Strong BEAR on both Coca-Cola and Pepsi. I strongly advised people to stay away from 2 Large Caps whose growth stories already happened...in favor of a beverage company whose #1 drink Dr. Pepper was currently the #1 fastest growing beverage in America.

    I laugh and laugh and laugh my butt off at JIM CRAMER telling people to stay away from DPS and instead buy PEPSI.... He did that numerous times on numerous shows. JIM CRAMER has been proven time and time again that he missed the real growth story in DPS and the growth problems in PEP.

  • Report this Comment On July 25, 2009, at 10:54 AM, rberry3242 wrote:

    At 2:47 p.m. we get this from Motley Fool. 3 Hours latter Motley Fool rates Pepsi as a Buy. Talk about the right hand not knowing what the left is doing.

  • Report this Comment On July 27, 2009, at 8:25 AM, nrlbuild wrote:

    rberry3242,

    You are right that the Fools do risk appearing uncoordinated by allowing this type of mixed opinion. I think it is a calculated risk.

    I like the different opinions from within the organization. I prefer having access to this information for my consideration.

    My opinion is that PEP is still a good holding for the right situation...long-term value which pays a dividend with little chance of collapse compared to more growth oriented companies.

  • Report this Comment On July 27, 2009, at 9:06 AM, treeman102 wrote:

    Pepsi is a good company with a good dividend, and it's not going away. Pepsi has made me tons of money over the last 45 years- going back to when my FRITO stock was coverted into Pepsi stock, and I will continue to hold it. One thing that I cannot figure out is the rebranding of Gaderade. You would think that they would have learned a lession from Coke's desasterous rebranding scheme.

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