Should PepsiCo Annouce a Major Strategic Shift?

By most measures, it was a great year for consumer giant PepsiCo (NYSE: PEP  ) , yet the market seemed disappointed by the company's results. PepsiCo reported solid organic revenue growth as well as earnings growth. And, it announced a major increase in the amount of cash it's going to send back to shareholders this year. In all, PepsiCo upheld its reputation as a blue chip with a world-class brand.

One reason for the market's apathy might be the continued struggles of PepsiCo's flagship beverage unit. Consumer attitudes are rapidly shifting in North America, and they're steadily shying away from sugary carbonated beverages. This begs the question: Should PepsiCo pursue a major strategic initiative to shake things up?

PepsiCo's earnings rundown
For 2013, PepsiCo reported a 1% increase in total revenue and 10% earnings growth. PepsiCo's tepid revenue growth is disappointing, but it's worth noting the company was weighed down by currency fluctuations. Organic revenue, which strips out currency effects, rose 4% in 2013. PepsiCo did particularly well in the emerging markets. Organic sales in its Asia, Middle East, and Africa division posted an 11% increase last year.

PepsiCo expects 2014 to be another strong year. Management projects 7% core earnings growth after stripping out currency fluctuations and mid-single digit organic revenue growth.

Snacks vs. beverages
Among PepsiCo's product mix, there was again a notable difference between its food and beverage divisions. Beverage volumes fell 2% in the Americas, while snack volumes increased 3%. Similar conditions were seen in Europe, where beverage volumes fell 2% and snack volumes rose 2%.

Stagnating sales volumes of sparkling beverages have afflicted PepsiCo's results as well as those of Coca-Cola (NYSE: KO  ) . Coca-Cola has struggled through the first three fiscal quarters. North American volumes are up just 1% over that time, reflecting the changing consumer landscape.

In response, Coca-Cola is shaking things up by partnering with Green Mountain Coffee Roasters (NASDAQ: GMCR  ) to develop at-home soda machines using Green Mountain's existing Keurig technology. Coca Cola will invest $1.2 billion for a 10% stake in Green Mountain to launch the Keurig Cold beverage platform. The deal is Coca-Cola's attempt to rejuvenate growth, while Green Mountain now has the backing of one of the world's most valuable brands and distribution networks.

PepsiCo has not announced a similar initiative. To soothe investor concerns, PepsiCo announced a major cash return program. PepsiCo increased its quarterly dividend by 15% and announced it would likely repurchase $5 billion of its own shares this year. In 2014, PepsiCo expects to return $8.7 billion to shareholders through dividends and share buybacks, which would represent a 36% increase over last year's capital returns.

Does strategic direction need clarity?
There wasn't much on the surface that the market should have been terribly upset with from PepsiCo's 2013 report. The company is doing a good job navigating a slow-growth economy. Its dividend increase and plan to increase share repurchases were just icing on the cake for investors. One thing that the market may be using as reason to sell PepsiCo is the lack of a major strategic announcement.

For example, PepsiCo's investor base has pushed the company to spin off its North American beverage unit. Sales in PepsiCo's flagship North American beverage segment have flat-lined in recent years as American consumers adopt calorie-conscious dietary habits. Others are hoping PepsiCo launches a similar strategic initiative to the partnership between Coca-Cola and Green Mountain.

It looks like PepsiCo will stay the course
Some might think PepsiCo may need something big to move the needle. However, management is in no rush to do anything drastic, which seems prudent. PepsiCo doesn't want to spin off its North American beverage business since it's still hugely profitable and represents a major brand connection with consumers.

In addition, PepsiCo seems reluctant to enter the at-home cold beverage business. There may be good reason for this, as the product has yet to really take hold with consumers. Consumers enjoy brewing coffee at home; whether they widely adopt making their own sodas has yet to be proven.

As a result, investors shouldn't at all be disappointed by PepsiCo's 2013 results or its future strategy. Instead, investors should be excited. Its outlook calls for 2014 to be another year of growth and continued penetration in the emerging markets; plus the company's aggressive cost-savings initiative will produce strong profits for many years.

Millions of Americans have waited on the sidelines since the market meltdown in 2008 and 2009, too scared to invest and put their money at further risk. Yet those who've stayed out of the market have missed out on huge gains and put their financial futures in jeopardy. In our brand-new special report, "Your Essential Guide to Start Investing Today," The Motley Fool's personal finance experts show you why investing is so important and what you need to do to get started. Click here to get your copy today -- it's absolutely free.

 


Read/Post Comments (0) | Recommend This Article (0)

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.

Be the first one to comment on this article.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2841858, ~/Articles/ArticleHandler.aspx, 9/30/2014 4:04:44 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...


Advertisement