Pepsi Hit by Good—But Not Great—News

10/08/2009 2:31 pm EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Before the stock market opened on October 8, PepsiCo (NYSE: PEP) reported third-quarter earnings of $1.08 a share and revenue of $11.08 billion.

The earnings were five cents a share above Wall Street earnings estimates—although up just slightly from the $1.06 reported in the third quarter of 2008—but the revenue was $170 million light, declining by 1.5% from the third quarter of 2008. (For more on the earnings season and the market’s revenue problem, see my October 5 post.)

Two factors held down results.

First, the world may be emerging from recession, but growth was still very low or even negative in the biggest parts of PepsiCo's market (North America and Europe) for much of the quarter. Beverage volume fell by 6% in the Americas, and snack volume was down 1% in Europe. Asia/Middle East/Africa revenue climbed 13% and operating profit was up 52%, but volume in these markets is still so much smaller than that in the company's developed economy markets that this performance wasn't enough to make up the difference.

Second, currency effects hurt revenue and earnings. PepsiCo said that in constant currency terms—correcting for changes in the exchange rates in the markets where the company does business—revenue would have been up by 5% (instead of down by  1.5%) and earnings would have been up by 8%.

PepsiCo anticipates that currency effects will take a "mid-single-digit" percentage bite out of future earnings growth. In constant currency terms, the company is looking for 11% to 13% earnings growth in 2010. (Those projections include cost cutting achieved by PepsiCo's acquisition of its two largest North American bottlers. PepsiCo said it expects that deal to close in the first half of 2010.)

So, why did the stock tumble? Because it had climbed going into earnings and this is a “sell on the news” kind of market. PepsiCo disappointed momentum investors by merely affirming its previous guidance on earnings and revenue for the rest of 2009. Without any “new” good news, they sold.

If' you've been looking to get into PepsiCo, this drop is a good entry point. I'm not changing my current price target at all today. I raised the target price to $68 a share on October 2, and I'm leaving it at that level. (The stock traded at around $60 Thursday afternoon.)

Full disclosure: I don’t own shares of any company mentioned in this post.

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