One of the more compelling images of commercial imperialism (if you see the world that way) is set in an exotic, far-off land where the locals are drinking cans of American soda. PepsiCo's (NYSE: PEP) impressive second-quarter results suggest that the new mental picture should instead be of foreigners munching bags of salty American snacks.
The updated image would still remind investors that international sales are responsible for much of Pepsi's growth, but it would also reflect the fact that international sales of carbonated beverages are not keeping pace with the growth in sales of other products, which mirrors a trend that has been occurring in Pepsi's home market.
Pepsi's second-quarter net income rose to $1.6 billion, a 13% increase over the $1.4 billion that the food and beverage company earned during the same period in 2006. Share buybacks helped the company grow earnings per share to $0.94, a 15% increase over the previous year's EPS. At a recent price of $68 per share, the company's stock now trades around 20 times earnings. Sales volume increased by only 4%, but Pepsi was able to pass along price increases that raised revenues by 10%. Total revenue was $9.6 billion, compared with $8.7 billion in the previous year.
Pepsi's international unit, which markets both beverages and snack foods, made the biggest contribution to both total sales and net income. International sales measured $3.9 billion, or approximately 40% of the company's overall sales. The international unit's operating income was $683 million, a remarkable 18% increase over the previous year. Snack volume grew by 9% and beverage volume grew by 8%, but sales of non-carbonated beverages grew at a much faster rate than sales of carbonated drinks. Gains on currency translation were responsible for 5 points of the unit's increase in operating profit.
The U.S. divisions also performed well, but relatively mature markets just can't deliver the same sales growth as emerging markets. In the U.S. beverage group, sales volume declined slightly, but revenue grew modestly as the company was able to pass on price increases. The Frito-Lay unit increased sales volume on snack foods by 3%, and revenues grew by 6%. The U.S. snack food division's operating profit rose by 8%; the unit's $682 million of operating income is now higher than the U.S. beverage group's $650 million.
The breadth of Pepsi's product portfolio has made the company's stock a more successful investment in recent years than the stock of soft drink rival Coca-Cola (NYSE: KO), which remains much more dependent on sales of its core product. Pepsi's reliance on junk food was apparently disconcerting to Swiss food giant Nestle, with which it was reportedly engaged in unsuccessful merger talks this past spring. Pepsi's customers don't seem to share those concerns, as evidenced by the company's continuing sales growth.
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Fool contributor Michael Leibert welcomes your feedback. He does not have a position in the securities of any of the companies mentioned in this article.
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