For seven quarters running, pop 'n' chips powerhouse PepsiCo (NYSE: PEP) has confounded Wall Street's best and brightest with its consistent thrashing of earnings estimates. But will Thursday morning's Q1 2008 report end the streak or mark the firm's second straight year of outperformance?
What analysts say:
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Buy, sell, or waffle? Fifteen analysts still drink the Kool-Aid at Pepsi, where buy ratings outnumber holds 2-to-1.
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Revenues. They're looking for 8.4% sales growth to $7.97 billion.
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Earnings. Profits are expected to rise in tandem, up nearly 8% to $0.70 per share.
What management says:
Anybody remember the YouTubian phenomenon of Summer 2006, when a couple of lab-smock-wearing imps came up with the bright idea of adding Mentos to bottles of Diet Coke and filming the results?
Well, it would appear that Pepsi is trying to make investors' heads explode like a Mentos-imbued bottle of soda pop. Management's reshuffled its reporting into three businesses. Basically, reporting will now go as follows:
- Drinks (PepsiCo Americas Beverages or "PAB") is a single business incorporating both North American (PBNA) and Latin American segments.
- Snacks gets split in three: Frito-Lay North America (FLNA), Quaker Foods North America (QFNA), and "Latin American food and snack businesses" (LAF).
- Internationally, one business -- PepsiCo International (PI) -- will be comprised of two sub-businesses -- one for the U.K. and Europe, and the other for the Middle East, Africa, and Asia.
Got all that?
What management does:
So, why all the reshuffling? Is Pepsi in trouble and figuring that a game of musical chairs might help hide its problems? The table below might suggest such conspiratorial thinking, what with gross margins continuing to slip, operating margins stuck in neutral, and the net taking a steep dropoff. Even if it's still beating Cadbury-Schweppes (NYSE: CSG), Kraft (NYSE: KFT), and Jones Soda (Nasdaq: JSDA) in the margins race, Pepsi still suffers by comparison to Coca-Cola (NYSE: KO) and Hansen Natural (Nasdaq: HANS) .
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Margins
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9/06
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12/06
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3/07
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6/07
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9/07
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12/07
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Gross
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55.5%
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55.1%
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55.0%
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54.8%
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54.7%
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54.3%
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Operating
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18.3%
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18.7%
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18.5%
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18.4%
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18.5%
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18.4%
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Net
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14.2%
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16.1%
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16.2%
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16.3%
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16.5%
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14.3%
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All data courtesy of Capital IQ, a division of Standard & Poor's. Data reflects trailing-12-month performance for the quarters ended in the named months.
One Fool says:
But remember -- everybody's suffering from gross margin contraction these days, what with commodities prices on the rise and all. So, stable operating margins in a rising costs environment are actually a good thing. And as for the plunge in Pepsi's net, as I explained last quarter, that's mainly a consequence of Pepsi having benefited from certain tax benefits last year that didn't repeat in 2007.
For my money, Pepsi's weathering the corn-brewed storm pretty well for a company whose stock and trade is hawking corn chips and carbonated corn syrup. Meanwhile, the company's doing a fine job of playing to its (international) strengths by buying growth abroad. Investing in beverages that don't depend on corn for their sweetness seems to me a smart move -- almost as smart as Coke's investing in it first.
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