3 Reasons to Love PepsiCo's Q1 Results

PepsiCo is finally performing in-line with Coca-Cola in the crucial North American market. Find out why this and two other facts are reason to love PepsiCo's first-quarter results.

Apr 22, 2014 at 11:45AM

PepsiCo (NYSE:PEP) recorded a strong first quarter to start off the year. Earnings per share came in at $0.79, exceeding consensus estimates of $0.75. That's a 14% increase over the same period last year, giving the company some breathing room as it battles activist investor Nelson Peltz, who is trying to break up the company.

PepsiCo's strong performance also gives it a much-needed confidence boost after having lagged Coca-Cola (NYSE:KO) throughout 2013. Here are the three top reasons why investors should be excited about PepsiCo's first-quarter results.

Reason No. 1: PepsiCo now competing with Coca-Cola
PepsiCo's beverage unit has underperformed relative to Coca-Cola for some time. In 2013, PepsiCo lost 40 basis points in U.S. carbonated-soft-drink market share, while Coca-Cola picked up the same amount. It also lagged Coca-Cola in liquid refreshment beverage share, losing 3.4 percentage points compared to Coca-Cola's 1.1 percentage point decline. Moreover, Coca-Cola announced lackluster first-quarter volume growth, including a sharp decline in soda volumes, so expectations were low heading into PepsiCo's quarterly report.

However, PepsiCo came through with a good quarter relative to Coca-Cola. Even though PepsiCo's global beverage volume was flat and Coca-Cola's increased 2%, the No. 2 American soft-drink company topped its competitor in the North American beverage market. North American beverages generate 30% of PepsiCo's revenue and 48% of Coca-Cola's. PepsiCo's North American beverage unit experienced flat volume growth and 1% organic revenue growth, while Coca-Cola's North American unit experienced flat volume and a 2% revenue decline.

Moreover, PepsiCo's carbonated-soft-drink volume in the Americas matched Coca-Cola's, with both experiencing a 1% decline. However, Coca-Cola edged out PepsiCo on non-carbonated beverage growth; its North American volume increased 3%, while PepsiCo's increased just 2%.

Turning around its North American beverage business is crucial to PepsiCo's ongoing prosperity. It appears that the beverage unit got back on track in the first quarter, a sign that things may be looking up for PepsiCo.

Reason No. 2: Higher prices, better mix
PepsiCo's North American beverage operations also impressed on pricing and product mix. Despite flat North American volume, PepsiCo increased revenue 2% by raising prices and stepping up advertising for higher-priced products.

Energy drinks, like PepsiCo's Mountain Dew Kickstart, retail for $1.99 per can, while a 12-pack of soda might cost just $3.50. In a phone interview with ABC News, CFO Hugh Johnston said the company's increased advertising has enabled the company to increase prices. He also said that PepsiCo intends to raise prices 2% to 3% across the board in 2014.

As soda consumption in the U.S. market -- which represents roughly 14% of PepsiCo's overall revenue -- continues to decline, the company must back its brands with heavy advertising to drive price increases across the board. PepsiCo's first-quarter results indicate that it has been able to do so thus far.

Reason No. 3: Encouraging full-year guidance
Management expects 2014 core constant currency earnings per share to increase 7% to $4.68. It also expects to return $12.4 billion to $13.7 billion to shareholders in dividends and share repurchases.

With a market capitalization of $130 billion, PepsiCo plans to return about 10% of the company's current market price in 2014 alone. That return of capital is enticing for any investor who believes that PepsiCo can continue its path back toward solid beverage growth.

Foolish takeaway
There is nothing earth-shattering about PepsiCo's first-quarter performance, but it was exactly what PepsiCo needed. The company is now performing in-line with Coca-Cola, even exceeding it in some cases, and is successfully growing revenue even as volume stagnates. Finally, PepsiCo is doing what any mature company with limited reinvestment opportunities should do: returning capital to shareholders. If every quarter looks as promising as this one, PepsiCo shareholders will enjoy outsized gains for a long time to come.

Boost your 2014 returns with The Motley Fool's top stock
There’s a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it’s one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

Ted Cooper owns shares of Coca-Cola. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool 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

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

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.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information

Compare Brokers