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PepsiCo: Cutting Costs and Investing in High-Growth Sectors

February 19, 2014 | About:
Muhammad Bazil

Muhammad Bazil

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While competition has always been stiff in the beverage market for Pepsi, the pressure coming primarily from Coca Cola (KO), the company has managed to persist and expand into other markets that its competitors have little foothold in. Pepsi’s fourth quarter report showed both success and disappointment but the company still has a strong foundation and solid business strategy suitably adapted for the changing markets.

Fourth quarter results and what’s in store for the coming year

Pepsi released a mixed report for its fourth fiscal quarter of 2013. While the company’s profits rose from $1.06 per share in 2012 to $1.12 per share this past year, its core earnings fell slightly at the same time. And although revenue rose by 3% in its snack and food division, revenue from beverages fell by 1.6%. All in all, the company did manage to surpass analyst’s estimates but not by all that much and not in every area with which investors are concerned.

Despite mixed results at the end of 2013, investors can still expect to benefit from owning stock in Pepsi. After the release of its fourth quarter report, the company announced that it will boost payouts through a combined process of buying back shares and increasing dividends. Furthermore, with dividend yields already at 2.90% before the planned increase, it had already been inching toward the higher end of the spectrum in that regard.

Business strategies and legal issues

After Coca Cola’s (KO) planned partnership with Green Mountain Coffee Roasters, Inc (GMCR), analysts speculated that Pepsi Co could make the smart and possibly necessary move to acquire SodaStream International, Ltd (SODA). SodaStream is the leading brand and innovator in the emerging market of home carbonation systems, a growing trend in the United States and abroad. The acquisition could benefit both companies as Pepsi would secure a foothold in this up-and-coming market while SodaStream would benefit from the financial backing required to grow and expand.

A potential minor setback could come in the form of a state tax on sodas being considered in Illinois. The tax is proposed as a health measure to decrease healthcare costs as well as discourage soda consumption. Should the penny per ounce tax be implemented, this could raise Pepsi’s costs in that state, resulting in a further decline in revenue in its beverage division.

On the other hand, one state’s soda tax will not have significant consequences for such a large company as Pepsi. Such an issue will only become of real concern in the event that the trend of taxing soda spreads to other states, increasing costs all across the board. While it is not a primary issue as of yet, this is a development to keep your eye on.

Pepsi has placed a lot of emphasis on increasing the efficiency and productivity of its operations over the past few years. Such improvements come as part of a plan to reduce costs by $1 billion per year. The plan was originally announced in 2012 and has so far stayed consistently on track. The company’s primary strategy for accomplishing this is through automation of the production process in order to reduce labor costs.

Aside from improving its operations efficiency, another focus of Pepsi’s business strategy will be in emerging markets. To date, about 30% of the company’s revenue is already coming from emerging markets and analysts expect this figure to grow in the coming years. It’s fastest growing division, for example, is its AMEA (Asia, Middle East, and Africa) division which had growth rate of 10% in 2012, vastly outperforming the company’s overall growth rate of 5%.

In North America, it’s most promising growth sector is its food and snack division. In recent years the company has made some major strides in its restaurant food offerings with good success. The growth we are seeing in this area is expected to continue into the future and will help to offset the declining profits from its beverage division.

Conclusions

PepsiCo will make a strong addition to your portfolio, particularly if you are looking for a longer-term investment. In the company’s strongest areas, we can expect growth to persist for many years to come. Furthermore, with the company’s prudent and effective strategy to lower operation costs, profit margins will continue to grow. The company also shows a commitment to its investors by consistently increasing dividends and its coming plan to buyback shares.

About the author:

Muhammad Bazil
Muhammad Bazil is a financial journalist and editor for a variety of websites, public policy organizations, and book publishers. He has written hundreds of published articles and blog posts on topics including budgeting, credit management, real estate and investing. His articles have been featured on the homepage of Yahoo!, MSN and numerous local news websites.

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