Pepsi Earnings Fizzle Past Estimates

PepsiCo PEP reported third quarter earnings this morning that "popped" past analysts estimates, and as a result, shares are "fizzling" higher this morning, up almost 3% as of the time of this writing. The Purchase, N.Y.-based company reported third quarter earnings of $1.31 per share on $17.6 billion in revenues. Wall Street had been expecting earnings of $1.30 per share on $17.19 billion in revenues. Pepsi was able to deliver a beat on both the top and bottom lines, which is important for a company in this environment. "We're focused on growing our business by providing consumers around the globe with great tasting products they love at a good value, and we believe this quarter's performance is a good indication that our efforts are working," said PepsiCo Chairman and CEO Indra Nooyi. "We had strong revenue growth across our product portfolio and across our key geographic markets. We were able to achieve pricing to partially offset commodity cost inflation and at the same time stimulate consumer demand for our products. The result in the quarter was well-balanced top-line and bottom-line growth." In addition to the company beating earnings, the company reaffirmed its previous earnings forecast, and said it expects to buy back $2.5 billion worth of company stock in 2011. There have been calls for the company to breakup the company, between soft drinks, and Frito-Lay, its big snacks division, as some shareholders believe the company would achieve greater shareholder value from a breakup. On the conference call, CEO Nooyi again refuted that call, saying the company would be better off remaining integrated. On CNBC this morning, CFO Hugh Johnston reiterated Nooyi's statements. Johnston said that he does not see the value in breaking up the company, which now includes Wimm Bill-Dann, the Russian dairy products company. The theory behind the breakup is that Pepsi, like Kraft KFT, would be better focusing on one business instead of two. It may also allow Frito-Lay to trade at the premium valuation many believe it deserves. Shares are not expensive for a company which was able to grow its revenues 37% year-over-year, thanks in large part to the Wimm Bill-Dann acquisition. Pepsi shares trade at just over 13 times 2012 earnings, and sport a 3.3% dividend yield, significantly higher than the yield on a 10 year U.S. Treasury. Since the beginning of the year, shares have lost 3.7%, not including dividends. The calls for the Frito-Lay may be warranted, with that kind of performance year-to-date. Either way, Pepsi's third quarter earnings were a tasty treat for investors, especially in a weak economic environment. Investors may want to drink to that. ACTION ITEMS:

Bullish:
Traders who believe that Pepsi will continue delivering strong results might want to consider the following trades:

• Pepsi shares might be cheap at these levels, trading below the average earnings ratio for the company.

• Traders may also want to look at Coca-Cola KO, Pepsi's major competitor.

Bearish:
Traders who believe that Pepsi shares will underperform due to worries about the breakup may consider alternate positions:

• The grumblings of breaking up the company may continue to grow louder, and shares could lag peers due to worries about the company executing this plan. Traders may want to short Pepsi until they get a better idea of whether Pepsi will actually break up or not.
  
  

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