PepsiCo's Earnings Beat Is Not As Spectacular As It Seems

PepsiCo, Inc. PEP reported better than expected second-quarter earnings before market opening on Thursday. EPS of $1.32 (excluding for one-time charges and benefits) on revenue of $15.92 billion for the quarter was better than what analysts were expecting. However, Ivan Feinseth, Tigress Financial Partners CIO, is not impressed with the beverage giant's results.

Feinseth was on CNBC recently to discuss why investors shouldn't applaud the PepsiCo's earnings beat.

Economic Profit Still Flat

"The growth is really coming from their snack food business," Feinseth began. "And the key problem is that their key carbonated beverage business is still flat to slightly declining. But more importantly the key measurements that we look at, return on capital minus cost of capital, their economic profit is still flat."

Snack Food Business Spin-Off

Feinseth was asked if he thinks PepsiCo should spin off its snack food business into a separate company. He replied, "Yes, I absolutely believe they should do that. There really is no synergy in manufacturing and selling soda and snack food. The only synergy that exists between the two is that they are consumed together."

The Key: Increasing Return On Capital

On whether he will like the stock only if the company spins off the snack food business, Feinseth said, "No, they don't have to do that. What they have to do is allocate capital to have a rising return on capital because our key measurement and our key driver is that the biggest driver of increasing shareholder value is a rising return on capital. And overtime their return on capital has declined from about 5 years ago about 15.5 percent to just around 6.5 percent today."