Filed Under:
Tickers in this Article: PEP, KO, KFT, K, GIS
Beverage and snack food giant Pepsico (NYSE:PEP) turned in a fourth quarter earnings report which displeased the market. Although the company posted mixed results, the specter of sharply rising costs and its slashed outlook made Wall Street unhappy.

IN PICTURES: 9 Simple Investing Ratios You Need To Know

Too Much Explaining
Pepsico had one of those reports clogged with too many explanations which sound defensive. Pepsico's performance, which actually wasn't that bad, was marred by the kind of spin and obfuscation that happens when a quarter doesn't go as planned. Simple, direct and straightforward is best, like Coca Cola's (NYSE:KO) report of tripled earnings in its quarter. That, the market gets and likes.

Earnings and More
The reported net income was $1.37 billion, or 85 cents per share for the quarter, which was down from $1.43 billion or 90 cents a share in the year ago quarter. Excluding items, EPS was $1.05. Pepsi's story is more complicated, as even though revenues for the quarter and the year were up well over 30%, this was largely attributable to the acquisition of Pepsi's bottlers. Excluding the added heft from the bottlers, North American sales volume rose by 1%, in contrast to Coke's 3% rise.

For the year, Pepsico's diluted EPS was up 4% to $3.91 from $3.77, with a 6% increase in net income, to $6.3 billion from $5.9 billion.While Pepsico suffers from a direct comparison with Coke - necessary though not entirely a fair one, as they have a different business mix - Pepsi's quarter and especially its year were decent performances.

Food Inflation
Pepsi roiled the market with its talk about increased costs on the horizon. While super-powered Coke seems, at least for the moment, immune to both food inflation and any other negatives, other companies are not. Kraft Foods (NYSE:KFT) lowered its full-year outlook due to a still weak consumer and higher ingredient costs. Cereal makers Kellogg (NYSE:K) and General Mills (NYSE:GIS) are also feeling the onset of higher input costs. So Pepsi joins the other food companies in feeling the pressure on the commodity front.

Pepsi's Take
The company lowered its earnings growth outlook to 7 to 8% for the coming year, and high single-digit rates after 2011. Pepsi sees commodity inflation for this year in the 8 to 9.5%range, which will translate into $1.4 billion to $1.6 billion in costs. Pepsi is more exposed to commodity inflation than Coke, as it's a more diverse food company.

Pepsi doesn't yet see the robustness of the economic recovery as others have, and it doesn't see the opportunity to raise its prices readily. More troubling to the market, though, was that Pepsi sees its growth muted perhaps for several years with the continued sharp rise of input costs.

The Bottom Line
Aside from Pepsi's handling of its presentation, the company was right to point out its legitimate long-term positive fundamental performance and strength. Pepsico does grow its business, remains a formidable company, and is worth a look when lowered expectations bring share prices farther down. (to learn more, see 22 Ways To Fight Rising Food Prices.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

comments powered by Disqus

Trading Center