Pepsi Buyout Obscures Good Quarter

By Greg Sushinsky | July 23, 2010 AAA

PepsiCo (NYSE:PEP) reported slightly lower net income in its second quarter due to buyout costs of its two largest bottlers, as well as currency fluctuations. Revenue increased from the deal along with strong performance in its global snack business. Pepsi's Gatorade brand showed improvement, as did its convenience store and gas station sales.

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Pepsi's Quarter
Pepsi's net income for the quarter was $1.6 billion, 98 cents per share, compared to $1.66 billion, EPS of $1.03 per share last year's same quarter.Currency fluctuations caused 11 cents less net income per share. Revenue was $14.8 billion, up 40% from Q2 last year. Pepsi's sales volume on a comparable basis, excluding a new distribution arrangement with Dr. Pepper Snapple (NYSE:DPS) fell 1%, an improvement over the 6% drop in last year's same quarter. Pepsi projects its distribution efficiency via the bottler buyout will pay off in savings of from $125 million to $150 million this year, and up to $400 million annually by 2012.

Pepsi's Bottlers
The buyout of its bottlers, Pepsi Americas and Pepsi Bottling Group by Pepsi for $7.8 billion is part of a slight shift in Pepsi's operations which the company hopes will yield even better results on top of its historical success. This greater vertical integration, along with the company's widening of its distribution channel via its Dr. Pepper Snapple distribution alliance, should position Pepsi well going forward. Note that Coca Cola (NYSE:KO) followed suit by buying its bottler, Coca Cola Enterprises.

Pepsi Versus Coke? Or Not?
Pepsi's makeup is somewhat different than main rival Coke, which is known as the dominant pure play in non-alcoholic beverages. Pepsi's business is far more than beverages. Pepsi's renewed surge in the snack market, along with the promising results for its Gatorade division, are reminders of its different approach. Pepsi's not necessarily better, mind you, but different. Coke is expected to continue its winning ways, but Pepsi shows that as one of the beverage titans, its ways can win big also.

More Than Soda Wars
Pepsi emphasizes that despite Coke and Pepsi being the two dominant soda giants, Pepsi's product diversity takes it beyond direct competition with Coke solely. Indeed, companies like Kraft Foods (NYSE:KFT) with its snack lines come into contact with Pepsi, while other consumer giants like Unilever PLC (NYSE:UL) with its Lipton Tea compete against sodas.The macro-trend toward juices and health drinks, along with the rough economy, has been a dampening demand factor for sodas. So while Pepsi's product diversity takes it out of the realm of sodas-only and competing with Coke and propels it heavily onto the snack shelf, this diversity takes Pepsi into the fray with many other food companies large and small.

Pepsi's Year Ahead
Despite the struggling economy, the company projects EPS to grow 11 to 13% in 2010. Its fiscal 2009 EPS was $3.71, so the $4.16 and $4.64 EPS for this year and next are not excessive projections.The stock has been recognized by investors and has been bid up near its 52-week highs, though its forward PE is reasonable - under 14 times. With a current yield of 3% plus the strong prospects of growth, this is a stock well worth owning long-term if you can buy it in the $50 range. (For more, check out Parched For Profits? Try Beverage Stocks.)

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