PepsiCo shares slumped as the firm trimmed its guidance

PepsiCo shares slumped as the firm trimmed its guidance

PepsiCo  shares slid by almost 4% on Thursday (7 October) after the soft drinks and snacks giant warned investors that it was cutting the upper end of its full-year earnings forecast. just-drinks examines the market reaction to the firm's results.

Despite PepsiCo's third quarter earnings being largely in-line with analyst expectations, the lower earnings forecast raised questions among analysts and investors as to whether the move was due to investment in new growth opportunities or a need to spend more in order to keep apace with fierce competition.

Morningstar analyst Philip Gorham told The Street that it was done for all the right reasons. "I don't really care that it takes a couple of cents off the EPS because it lays growth for groundwork for the next few years," Gorham said, adding that PepsiCo's cut in growth forecast was justified.

Like other analysts, Gorham said that PepsiCo was "sacrificing short-term gain for long-term growth" by investing resources into China and other growth markets, such as its health portfolio as in US and Europe - markets that remain relatively weak.

PepsiCo president and CEO Indra Nooyi brushed off analyst concerns on the firm's earnings conference call yesterday.

"All we're doing now is tightening the guidance," Nooyi said. "We feel very good about where we are. In today's macro economic environment, to deliver 11-12% earnings per share is a fantastic performance. We are managing the company for the long term."

PepsiCo recorded rises in both sales and profits for its third quarter, driven in part by the acquisition of its two anchor bottlers earlier this year.

Net profits in the three months to 4 September were up by 12% year-on-year to US$1.92bn. Sales in the period leapt by 40% to $15.51bn, while operating profits increased by a healthy 25% to $2.80bn.

"I think it was a good quarter [and investors have] what looks like an opportunity to buy on a little bit of weakness," Wall Street strategies analyst David Silver said.

He added that, while the sales are "quite modest", it shows the division's ability to continue to be profitable in a difficult economic climate.

"There have also been pockets of strength around the world, such as in Russia, Latin America and India, and the sovereign-debt problems and austerity measures in Western Europe haven't affected businesses as much as many analysts feared," Silver said.

Stifel Nicolaus analyst Mark Swartzberg said Asia, Middle East and Africa was the firm's area of "greatest concern", because it has been a growth engine for the firm and saw sales weaken in the third quarter.

However, Swartzberg said: "We expect spending in the region to minimise any further weakening." He added: "We also see continued earnings flexibility for the whole of PepsiCo in 2011 due to productivity initiatives, cost overlaps, and organic growth in various businesses including PepsiCo's largest, Frito-Lay North America."

And it is spending that PepsiCo is certainly doing with the focused on innovation around beverages and snacks as a growing number of consumers turn away from carbonated soft drinks and less-healthy snacks.

Gorham said he was encouraged by PepsiCo's announcement of a Global Nutrition Group. "All these consumer staple firms have to be involved in developing healthier or functional products because that's what consumers want for both drinks and foods," he said.

"Companies that can lead that demand will set the stage for growth over the next decade or so," he said.

Nonetheless, Swartzberg yesterday reduced its fourth quarter EPS target to US$1.01 from $1.06 previously, taking its full-year estimate to $4.11 from $4.16.

"Our reductions reflect increased estimates of spending in PepsiCo Americas Beverages. On the margin, this is a negative, but we continue to view the core investment case as a cash-generative staples company with improving revenue trends."

Aside from the guidance trimming, PepsiCo made a strong showing in the quarter several analysts said that the firm's fundamentals - the successful acquisition of bottlers, a number of leading brands and a focus on growing its healthy portfolio - should all continue to drive results.