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Tickers in this Article: PEP, KO, SBUX
PepsiCo (NYSE:PEP) managed to beat consensus expectations for its third quarter and its operations appear to be heading in the right direction, but is all of this due to good decisions by management, or is there more to the story - something "foreign", perhaps?

Let's investigate further.

Beating Expectations
Analysts polled by Thompson Financial estimated PepsiCo would earn 96 cents per share, but in the results for the quarter ending September 8 it was revealed the company earned $1.06 per share for a 16.7% rise. Even after accounting for a one-time charge, core earnings were still 99 cents per share compared to last year's 89 cents.

Currency Fluctuations a Big Part of PepsiCo's Success
The company's revenue rose by 11% to $10.17 billion from $9.13 billion last year and overall operating profit grew by about 10%, to $2.06 billion from $1.86 billion.

The fast growing PepsiCo International was once again the star of the show, reporting an operating profit that grew by 19% on revenue growth of 22%. According to press release regarding the company's Q3 results, sales volumes grew by 5% in Latin America, 7% in Europe, the Middle East and Africa and 20% in Asia. However, given that the U.S. dollar has lost over 10% against the euro this past year, much of that growth in revenue can be attributed to positive currency translations.

In fact, currency translations had more than a cursory effect on PepsiCo's earnings. Of that 22% growth in PepsiCo International's revenue, further digging in the press release and 10-Q reveals that around 6% of that revenue growth was a result of positive currency translations. (To learn more on foreign currency exchange, see A Primer On The Forex Market.)

According to a Forbes article, PepsiCo's chief executive officer, Indra Nooyi has stated that the company spent roughly $1 billion on acquisitions so far this year and is ready to do more if the acquisition makes sense - either to fill holes in existing product lines or to establish a presence in another country. Furthermore, the company is seeing good results from its acquisition of Bluebird foods in New Zealand and has added 11 countries via its joint venture with Lipton. PepsiCo has also extended its partnership with Starbucks (Nasdaq:SBUX) which will give it a distribution channel in China.

The Flip Side
Rising commodity prices are a serious challenge for PepsiCo on the cost side of the equation with the current imbalance of quality grain prices of such products as corn and wheat. The company has an excellent management team and hedging program, but hedges can only accomplish so much. The onus is clearly on PepsiCo to continue to produce good results. With the management team's commitment to innovation one can only hope this will continue to be the case.

The other area of concern is that many of PepsiCo's products are considered to be "junk food". The company is addressing that issue with such brands as Quaker Oats, Tropicana and Dole. It is the firm's ambition to make healthy foods as popular as its other snack foods. PepsiCo's management has a reputation for being nimble and forward thinking, and it should be able to accomplish this.


Market Reaction
The market's reaction to PepsiCo's earnings announcement was take the share south about 2.5%. PepsiCo is in the food business, not the foreign exchange trading business. Therefore, the market appears to be a little wary of PepsiCo's results in light of the significant portion that came from currency fluctuations. Hedging currency and commodity exposure is a good thing for a company to do, but the goal should be to grow the business either organically or by acquisition if need be.

The end fact for investors however, is that even though PepsiCo's shares have appreciated roughly 15% over the last year, the company's arch rival Coca-Cola's (NYSE:KO) shares have returned about double that at roughly 30% over the same time period.

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