Fool.com: Frito-Lay, Tropicana Save the Day For PepsiCo (Breakfast News) September 3, 1999

BREAKFAST WITH THE FOOL

Friday, September 3, 1999

"The art of prophecy is very difficult, especially with respect to the future."
-- Mark Twain

Frito-Lay, Tropicana Save the Day For PepsiCo

By Brian Graney (TMF Panic)

Beverages and salty snack foods marketer PepsiCo (NYSE: PEP) confirmed fears last night that its soda business has been losing some of its fizz this quarter, although the situation is not expected to hamper third quarter earnings. The company said North American unit case volumes for carbonated beverages have fallen "modestly" over the last three months as retailers have pushed through higher prices. The trend, when combined with an expected 4% drop in concentrate shipments as bottlers adjust their inventories, will lead to lower operating income from the firm's Pepsi-Cola North America division.

Fortunately for PepsiCo, strong performances by its Frito-Lay snack food and Tropicana juice units will offset the profit slowdown in North American soft drinks. As a result, earnings for the quarter should come in ahead of last year's pro forma results of $0.32 per share. Currently, the First Call mean estimate is calling for EPS of $0.33. Separately, the company also announced plans to repurchase $500 million of its shares from now until year-end under its two-year, $3 billion stock buyback program.

Pepsi-Cola North America accounted for only 13.5% of the company's total sales in the first half. However, the unit is very profitable, generating first-half operating profit margins of 27.6% and a return on average segment assets of 63.9%. However, Frito-Lay North America is not necessarily a slacker, either, sporting operating margins of 18.6% and a return on average segment assets of 17% for the first six months. The unit is undeniably PepsiCo's main profit engine, representing 51% of total first-half operating profits despite an asset impairment charge and the addition of profits from the recently acquired Tropicana. That is up from a 48% share of total operating profits a year ago.

News to Go

Carbonated beverage marketer Coca-Cola (NYSE: KO) said its Q3 earnings will be $0.34 to $0.35 per share (excluding the impact of a European contamination scare during the period), falling short of the First Call mean estimate of $0.36. North American unit case volumes are expected to grow by 2% to 3%.

Online discount broker National Discount Brokers (NYSE: NDB) warned that lower-than-expected revenues and higher advertising expenses will lead to fiscal first quarter earnings of $0.01 to $0.02 per share, missing analysts' estimates of $0.21 to $0.22 per share.

Bedroom and bathroom textiles maker Pillowtex Corp. (NYSE: PTX) said manufacturing problems, lower margins, and higher expenses will result in Q3 EPS between $0.25 and $0.30 and Q4 EPS between $0.50 and $0.55. Analysts had been expecting EPS of $0.86 in Q3 and $0.82 in Q4, the company said. President and COO Jeffrey Cordes has resigned "to pursue other interests."

Specialty metals and aerospace products maker Allegheny Teledyne (NYSE: ALT) named Thomas Corcoran as its new president and CEO. Corcoran was formerly president and COO of the space and strategic missiles segment of Lockheed Martin Corp. (NYSE: LMT).

Pharmaceutical contract research organization (CRO) Quintiles Transnational (Nasdaq: QTRN) will be added to the S&P 500 Index in place of TV show syndicator King World Productions (NYSE: KWP). King World is being acquired by media giant CBS Corp. (NYSE: CBS).

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