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Few Reasons Why PepsiCo Can Prove To Be A Good Investment

July 10, 2014 | About:
Suravi Thacker

Suravi Thacker

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A turnaround plan takes time to show its impact and so is the case with PepsiCo (PEP) which has been in a turnaround phase and is expected to beget huge benefits. The beverage provider posted its first quarter earnings, beating estimates on the bottom line and giving hints of a great future ahead. Let us explore the possibilities.

The performance

In an effort to build a strong reputation for itself PepsiCo was firm in its decision of not lowering its beverage prices. This affected its sales volume, especially its soda sales and Gatorade sales, since its industry players, especially its arch-rival Coca-Cola (KO) lowered prices to lure customers.

Also, it has been re-franchising its beverage business in Mexico and China, which were expected to hamper the top line during the quarter. As a part of its turnaround plan, the company got rid of some of its unprofitable businesses such as some juices and bottled water which caused a decline in overall revenue.

These factors, along with unfavorable currency movements kept revenue flat at $12.6 billion, over last year. However, growth in PepsiCo’s food business helped offset the negative impact of weak beverage volumes to some extent. Nonetheless, we should also consider the organic growth of a company which excludes the effects of currency fluctuations, acquisitions or divestitures. Sales grew 4% organically owing to the great demand in Asia, Middle East and Africa.

Even China performed well with sales growth in each of the months during the quarter. This is in sharp contrast to what Coca-Cola is going through. Coca Cola has reported weak sales in China. In fact, the beverage leader also reported its earnings, which were below analysts’ expectations in spite of initiatives taken such as attractive small packaging, lower prices and increased advertising.

Moving down to PepsiCo’s bottom line, adjusted earnings stood at $0.83 per share, compared to $0.77 per share, a year earlier.

Key strengths

PepsiCo’s new strategies to stage a comeback includes its jump into the yogurt business which has become increasingly lucrative for most of the food companies such as General Mills (GIS). General Mills has been experiencing a great revenue increase mainly because of its Greek yogurt business and the same is expected out of PepsiCo also. The reason behind General Mills booming yogurt segment is the fact that consumers have become increasingly health conscious and are in search for healthy products.

The beverage giant launched some new product launches. This includes products such as Pepsi Next, a low calorie drink, which was loved by health conscious customers. The company also intends to focus on the energy drink segment.

PepsiCo’s snacks such as its most popular Frito-Lays chips and the new Doritos tortilla chips are liked by the consumers highlighting the positive growth going forward.

These new and attractive products will be coupled with increased marketing globally, which will help push demand north. Additionally, it has started advertising its flagship brand, adding attractions such as pop stars and other celebrities for its marketing campaign. These efforts look increasingly attractive and favorable for the company.

Wrapping it up

There are no doubts on the bright future prospects of the company given the amazing strategies formulated. Though PepsiCo faced some unexpected bumps during the quarter, it did not fail to meet expectations. Moreover, it stood by its previously defined guidance in spite of the unexpected occurrences. With a strong restructuring plan in place, cost cutting initiatives and a wide range of new innovative products, the company looks increasingly attractive. Investors should definitely take notice of this opportunity.


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