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Costs Are Bubbling Up for Pepsi

By Matt Koppenheffer - Updated Apr 6, 2017 at 9:08PM

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In its first-quarter earnings report, Pepsi showed that it's battling cost inflation just like all of the other consumer goods companies.

The market liked PepsiCo's (NYSE: PEP) earnings report. Core earnings per share came in at $0.74 for the quarter, above the $0.73 that analysts estimated, and predictably, investors bid up shares.

The story behind those numbers is a bit more nuanced. It is also a little hard to pick apart because of the bottler acquisitions it completed early last year and the more recent acquisition of Wimm-Bill-Dann.

For the most part, the quarter looked good for Pepsi, with positive volume and revenue growth for most divisions and around the world. Snacks were a particular strength during the quarter with 2% growth in the mature North America market and faster growth in overseas markets -- including double-digit gains in India and China. Emerging markets in general were strong with snacks and beverages posting strong growth in Mexico, Argentina, Russia, Turkey, India, China, and the Middle East.

Less fizzy
As with prime beverage competitor Coca-Cola (NYSE: KO), gains in flagship-brand soft drinks have been tougher to come by in North America, and despite strong gains from Mountain Dew, Sierra Mist, and Pepsi Max, soft drinks in the entire Americas region were flat with a year ago. However, noncarbonated drinks performed much better with an impressive 20% increase for Gatorade in North America.

As compared with the rest of the company, the Quaker Foods division looked sickly as both volume and revenue posted significant declines. Operating profit for the segment rose, but most of the gain was due to an accounting change.

That darn inflation
Finally, we can't have a discussion of a food, beverage, or consumer-products company without touching on rising commodity costs. The problem is everywhere -- Coke, Unilever (NYSE: UL), Dr Pepper Snapple (NYSE: DPS), McDonald's (NYSE: MCD) -- and it doesn't seem that anyone expects it to ease up any time soon.

In my coverage of Procter & Gamble's (NYSE: PG) quarter, I noted that all manufacturers -- branded goods and private label -- are facing rising costs, so it's not like Pepsi and its ilk are in a unique position. The moral of that story, though, is that investors will want to keep an eye on the next few quarters and specifically how sales and volume respond to price hikes aimed at offsetting the cost pressures. The results could be revealing as far as showing what kind of pricing power Pepsi really has.

Always a challenge, but still shining
There will always be challenges for a business to overcome, and Pepsi has its share right now -- most notably the cost pressures. However, this is still a great company with great brands, and it's posting strong growth around the world. The stock has a nice 2.8% dividend, and while I won't pound the table on the price, 15.5 times expected 2011 earnings isn't terrible for a quality company like this.

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Stocks Mentioned

Pepsico, Inc. Stock Quote
Pepsico, Inc.
PEP
$166.13 (1.24%) $2.03
McDonald's Corporation Stock Quote
McDonald's Corporation
MCD
$247.90 (1.77%) $4.32
The Coca-Cola Company Stock Quote
The Coca-Cola Company
KO
$63.04 (1.88%) $1.16
The Procter & Gamble Company Stock Quote
The Procter & Gamble Company
PG
$144.35 (1.44%) $2.05
Dr Pepper Snapple Group, Inc. Stock Quote
Dr Pepper Snapple Group, Inc.
DPS
Unilever PLC Stock Quote
Unilever PLC
UL
$46.25 (3.77%) $1.68

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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