Core earnings for PepsiCo Inc. (PEP) climbed 10% in the second quarter to $1.21, compared to last year’s $1.10. The higher earnings were driven by operating profit growth and a lower year-over-year core income tax rate.
Earnings were in line with the Zacks Consensus Estimate.
The New York-based company reported growth in volume, revenues, operating profit and earnings per share, fueled by top line gains across its worldwide snacks and beverage businesses and from the acquisition of Wimm-Bill-Dann (‘WBD’), the leading dairy and Juice Company in Russia.
Based on the second-quarter 2011 results, PepsiCo expects earnings per share growth in the high-single-digits for fiscal 2011. This fiscal estimate also considers the estimated foreign exchange translation benefit of approximately 2% point, from its fiscal 2010 core EPS of $4.13.
The company further expects that the acquisition of WBD will reap benefits.
Top Line and Margin Details
Total sales in the quarter jumped 14% to $16,827.0 million from $14,801.0 million in the prior-year quarter, displaying the benefits of organic volume growth, effective net pricing and favorable foreign exchange.
Revenues were also above the Zacks Consensus Estimate of $16,338 million.
PepsiCo registered an operating profit of $2,754 million, up 12.0% compared with $2,461 million in the prior-year period.
Segment Details
Revenues from PepsiCo Americas Foods (‘PAF’) gained 7%, while PepsiCo Americas Beverages (‘PAB’) was up 1%, Europe soared 52% and Asia, Middle East & Africa (AMEA) jumped 17%.
Operating profit for PAF and PAB advanced 9% and 3%, respectively. Europe and AMEA saw operating profit increase 47% and 12%, respectively.
In the PAF segment, Frito-Lay North America (FLNA) and Latin America Foods (LAF), registered increases of 2% and 5% in volume, respectively, which got partially offset by a 2% volume decline in the Quaker Foods North America (QFNA) segment.
PAB results reflect difficult pricing comparisons experienced in the prior year quarter.
Revenues and operating profit growth in Europe comes on the back of the WBD acquisition, effective net pricing, shipment timing and settlement on promotional spending. This is offset by cost inflation, including potato costs in Russia and extensive spending on go-to-market initiatives in Eastern Europe.
AMEA’s performance benefited from effective net pricing, shipment timings and the recovery of a previously written-off receivable, offset by higher commodity costs.
Financial Update
PepsiCo exited the year with cash and cash equivalents of $2,913 million, long-term debt of $21,607 million and shareholders equity of $24,370 million.
Keeping in mind the company’s strategy of returning incremental value to shareholders, PepsiCo intends to repurchase shares worth $2.5 billion in fiscal 2011.
PepsiCo’s operating cash flow was $2.4 billion and net of capital expenditures were $1.2 billion for the quarter.
Pepsi in Neutral
A strong new product pipeline, robust international sales, on-going manufacturing productivity initiatives and an active stock program are all positives for PepsiCo. Moreover, strong growth in the developing and emerging markets is also a benefit. The Asia Pacific markets, such as China and India, are leading the way with double-digit volume increases in snacks and beverages.
However, we are concerned by Pepsico’s vulnerability to currency translations during times of U.S. dollar strength, and the possibility of the company facing an inflationary impact of approximately $1.4 billion to $1.8 billion on a base of $18 billion of commodity base.
Currently, we prefer to be Neutral on the stock. Furthermore, Pepsi holds the Zacks #3 Rank, which translates into a short-term ‘Hold’ rating.
PEPSICO INC (PEP): Free Stock Analysis Report
Zacks Investment Research
