Soft drink and snack maker PepsiCo Inc. (PEP) reports earnings for its fiscal third quarter on Thursday Oct 8, 2009. In the last three quarters, the company has managed to surprise the investors by reporting higher earnings than the market's consensus.
Analysts' estimates for the quarter ending September 2009 (Q3) range from a low of $0.97 to a high of $1.05, with a consensus of $1.023. The consensus EPS forecast has decreased over the past week from $1.024 to $1.023 (-0.10%) and increased over the past month from $1.022 to $1.023 (0.10%). Of the 11 analysts making quarterly forecasts, 1 raised and 1 lowered their forecast.
The company's diversified global portfolio and business model advantage should have enabled the company to drive solid performance in the third quarter. Under the Pepsico umbrella are some of the most recognizable brand names, including Frito-Lay, Gatorade, Tropicana and Quaker. This diversification has kept the company fresh, especially this year when it has made great strides to change with the times. The blue-and-red logo got a makeover, and Gatorade went with the more modern 'G'. In response to a more health-conscious society, Pepsi Throwback was introduced with sugar instead of corn syrup, and the company went green with spring water and cane sugar in Pepsi Natural.
Across the globe, the company is expected to post top line growth in local currencies in countries that represent about 95% of its revenue base. Gross margin and operating margin increased in both Q1 and Q2. The growth is expected to continue in Q3 as well. Strong performance in the company's international businesses and in domestic snacks could offset moderating declines in its North American beverage business.
For the fiscal year ending December 2009, the consensus EPS forecast has increased over the past week from $3.706 to $3.709 (0.08%) and increased over the past month from $3.700 to $3.709 (0.24%). Of the 12 analysts making yearly forecasts, 3 raised and none lowered their forecast.
The increase in fiscal year consensus EPS is driven by lower projections for the cost of interest and for depreciation. The company's top line growth is also expected to be continued due to M&A and tuck in deals. For instance, in August, Pepsi reached agreements in August to acquire its two largest bottlers – Pepsi Bottling Group, Inc. (PBG) and PepsiAmericas, Inc. (PAS) – for $7.8 billion. The company will form a new bottling unit — PepsiCo Bottling North America — with Eric J. Foss, head of Pepsi Bottling Group, as CEO. This move could potentially eliminate an estimated $500 million to $1 billion in redundant costs. Shareholders could see this reflected in an increase in net income up to 20%. While the deal has lagged a bit and affected PEP's share price, it is expected to close in late 2009 or early 2010. In August, PepsiCo acquired Amacoco, Brazil's largest distributor of coconut water; last year, it acquired Russia juice-maker Lebedyansky, along with PBG. Pepsi is doing well in the two big Asian markets namely, China and India. So posting an earnings growth in the range of 10%-12% per year shouldn't be much of a problem.
Currently, the stock is trading at $60.87, compared to the 52 week range of $43.78-$67.85. The stock seems to be undervalued by 5% at the current levels.
