Updated Research Report on Pepsi - Analyst Blog

On Apr 3, 2014, we issued an updated research report on PepsiCo, Inc.PEP.

Pepsi had a mixed fourth quarter, beating the Zacks Consensus Estimate for earnings but missing the same for revenues. Adjusted earnings of $1.05 per share declined 3.5% year over year as aggressive marketplace investments, currency headwinds and higher tax rates offset pricing and productivity gains. Organic revenues increased 4.1% as higher pricing and strong performance by the snacks business offset weakness in European and American beverages.

Overall, we are encouraged by the company's strong brand portfolio, product and geographic diversity, improved productivity, increased brand building investments and market execution, efforts to innovate and solid cash flow generation. Also, the company's plans to substantially increase shareholders returns in 2014 and extend productivity initiatives are encouraging. At the fourth-quarter conference call, the company announced its plans to increase 2014 cash returns by 35% and a new $5 billion productivity program along with its intention to retain the North American beverage business.

However, a challenging consumer spending environment, volatility in emerging markets and continued sluggish volumes in the North American beverage business keep us on the sidelines.

Pepsi's carbonated soft drinks CSD volumes are suffering due to challenges faced by the category. The CSD category declined for the ninth straight year in 2013 due to growing health consciousness since consumers have become particularly vigilant about the use of artificial sweeteners, high sugar content and related obesity concerns. Among the CSDs, the cola segment has particularly come under fire as consumers are opting for alternative beverage offerings. Also, possible new taxes on sugar-sweetened beverages and growing regulatory pressures are affecting CSD sales. These challenges have also been felt by major soft drink makers — Pepsi, The Coca-Cola Company KOand Dr Pepper Snapple Group, Inc. DPS — leading to lower volumes and weak sales.

PepsiCo has increased marketing investments and is driving package and product innovation to boost its American beverage business. Moreover, the company is looking for structural alternatives to turn around this business. However, we prefer to wait until we see a substantial turnaround.

Other Stocks to Consider

Pepsi carries a Zacks Rank #3 (Hold). A better-ranked beverage stock is Monster Beverage Corporation MNST with a Zacks Rank #2 (Buy).