The stage was set: Heading into third-quarter earnings season, investors were on the edge of their seats wondering whether PepsiCo (NYSE: PEP) could effectively battle the inflation monster, raising prices to offset the bites it was taking out of profits while not scaring off its loyal customers.
OK, "edge of their seats" may be pushing it, because, as I've continually stressed in the past, PepsiCo's story is generally not one that has drastic quarter-to-quarter climaxes. Like many of the other giant consumer goods companies -- archrival Coca-Cola (NYSE: KO), Procter & Gamble (NYSE: PG), Colgate-Palmolive (NYSE: CL) -- PepsiCo's success is best measured over years or even multiples of years.
With that in mind...
As far as the headline numbers, PepsiCo did well. Total revenue was up 13% from last year to $17.6 billion, topping analysts' estimates of $17.2 billion. On the bottom line, "core" earnings per share of $1.31 were up 7% from last year and ahead of the average estimate of $1.30.
But for many investors, the company's handling of the inflation boogeyman was a much more pressing concern than the headline numbers. Commodity prices have been a major challenge for everybody in the consumer packaged-goods segment as companies have had to walk a careful line between letting higher input costs eat away at margins and scaring off loyal customers with hefty price hikes.
The third quarter seemed to suggest that PepsiCo has been able to recover at least some of the higher input costs through higher prices. The impact of pricing actions was particularly noticeable where PepsiCo Americas Foods -- which includes the Frito-Lay and Quaker Foods businesses in North and South America -- saw revenue growth of 6% from the same quarter last year on just 1% volume growth, while PepsiCo Americas Beverages' revenue was up 1.5% from 2010 on no volume growth.
These price increases are likely to continue feeding through in the coming quarters, but it may still be too early to tell to what extent the higher prices will impact volume, so investors will want to keep an eye on this in the coming quarters. However, the fact that PepsiCo is successfully pushing through higher prices is good news for investors -- after all, why invest in a consumer packaged-goods company like PepsiCo if its brands aren't strong enough to hold up to inflation-driven price increases?
What else is good ... and not so good
The emerging markets continued to be a great source of growth for PepsiCo during the quarter. Snacks volume was up 31% in China, 26% in India, and -- excluding Wimm-Bill-Dann -- snacks revenue has jumped 70% over the past two years in Russia. Meanwhile, beverage volume was up 19% in India, 16% in Turkey, and 12% in Saudi Arabia.
The "nutrition" business that PepsiCo has put so much effort into also looked strong. Excluding acquisitions, year-over-year revenue was up 8%. That growth was chalked up in part to the strong performance of the Gatorade brand behind initiatives like G Series. Gatorade volume was up 9% for the third quarter on top of 15% growth last year.
What's less good is the company's continued struggle with its core carbonated soft drinks, particularly in the developed markets. On the conference call, CEO Indra Nooyi said, "We are pushing forward with our aggressive game plan to engage consumers through innovation, marketing, and value." The goal is to make up some ground that's been lost to Coca-Cola, but PepsiCo will have to try to do this while also managing its price increases. It's a tough row to hoe, and investors will want to watch America's beverage volume in the coming quarters for signs that the marketing push is actually paying off.
What to do?
I don't see any reason that current PepsiCo investors shouldn't stick with the company. There are challenges to be met, but there are a lot of very strong brands here and I see some good forward thinking -- like the nutrition push -- coming from management.
And what about investors on the sidelines? I think there's good reason to give PepsiCo a look if you haven't tuned in lately. I didn't realize how much the stock had fallen since midsummer. Even after the post-earnings bump, the stock has fallen significantly, and if $62 doesn't represent a screaming bargain, it's at least a very fair price for a great company.
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