PepsiCo Proves Its Business Model Is Perfect Just the Way It Is

PepsiCo delivered impressive results Thursday for its first quarter, proving that the marriage between its beverage business and snacks business is a happy one.

Apr 19, 2014 at 1:00PM

PepsiCo (NYSE:PEP) has been under pressure recently from activist investor Nelson Peltz to spin off its snacks business from the company's North American beverage segment. But Pepsi released fiscal 2014 first-quarter earnings before the bell on Thursday that should help silence Peltz's demands, if only momentarily.

In the past, Peltz has used weak earnings and declining market share in PepsiCo's beverage business to rally support behind breaking up the company. He has also pointed to Pepsi's stock underperforming its rivals in price and earnings growth.

However, the company boosted earnings growth in its latest quarter and the results could signal cracks in Peltz's argument going forward. Moreover, investors pushed Pepsi's stock slightly higher on the news.

Rising profit lifts Pepsi's boat
PepsiCo delivered impressive first-quarter results, with profit increasing 15% to $1.22 billion, or $0.79 per share on a GAAP basis. This was $0.04 better than analysts' estimates for earnings per share of $0.75 in the quarter. Pepsi's net revenue of $12.62 billion also came in slightly ahead of expectations. Wall Street was looking for quarterly revenue of $12.4 billion.

A spike in snack sales, as well as lower costs in the period, was behind Pepsi's upbeat results. The company's global snacks volume increased 2%, which helped offset a 1% decline in Pepsi's North American soda volume. Nevertheless, it's important to note that Coca-Cola (NYSE:KO) also showed slowing sales of carbonated beverages in its recent earnings results.

While Coke's total beverage volume rose 2% in its latest quarter, the rival pop star posted a 1% decline in its carbonated-beverage volume, similar to Pepsi. Both Pepsi and Coca-Cola have been struggling recently to boost sales in their respective carbonated drinks businesses amid slowing demand in North America. Fortunately for Pepsi, the company's salty snacks business seems to be doing the trick.

Snack on this
Revenue climbed 4% in PepsiCo's Frito-Lay North America segment in the quarter, helped by growing volume sales and the company's ability to charge higher prices for its snacks. Thanks to its recognizable global brands like Lay's potato chips and Quaker Oats, Pepsi has proven it can successfully raise prices without backlash from customers. This should continue to pay off for the company down the road.

Pepsico Earnings

On top of this, Pepsi is reining in costs. Pepsi shrunk its overhead costs by 1.5% in the first quarter, which slightly boosted its gross margin to 54.5% in the period. Moreover, as promised, Pepsi is set to return $8.7 billion to shareholders this year. Approximately $5 billion of this will come from share repurchases, with the other $3.7 billion in dividends.

Ultimately, PepsiCo is showing its critics it knows how to put its investors first and create shareholder value, without breaking up the business. This should buy the company some time before activist investors start making noise again.

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Tamara Rutter has no position in any stocks mentioned. The Motley Fool recommends and owns shares of Coca-Cola and PepsiCo and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on 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. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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