PepsiCo has beaten analyst expectations for first quarter profits but Morning Star analyst Philip Gorham believes that in beverages Coca-Cola is recovering better from the recession.
Quarterly net income at PepsiCo stood at $1.14bn - slightly above analyst estimates but down from the $1.43bn reported last year because of interest expenses linked to its bottler acquisitions.
The maker of Gatorade and Tropicana said like-for-like beverage volumes rose 3.5 per cent while snack volumes were up 3 per cent.
But these figures were not enough to persuade the markets that PepsiCo deserves a higher stock valuation. Explaining why, Morning Star analyst Philip Gorham pointed to the weakness of the beverage business since the recession.
“The beverage business has been particularly weak, and we think Pepsi’s sluggish recovery from the downturn in beverages, particularly in comparison with Coke, is a key reason for its low relative valuation.”
In beverages, PepsiCo is not only struggling to increase sales - it is also facing higher input costs as PET and sweetener prices rise.
During its earnings call, PepsiCo CFO Hugh Johnston said: “In the first quarter, inflation impacted our beverage operations more dramatically than our snacks. We covered some but not all of the beverage commodity cost inflation with pricing.”
Over the year PepsiCo is expecting costs to go up across its business by $1.4bn - $1.6bn on a base of $18bn of commodity based inputs.
But not everything is pointing the wrong way for PepsiCo. The company is reaping the rewards from its focus on emerging markets.
PepsiCo Chairman and CEO Indra Nooyi emphasized the point in a statement announcing the first quarter results. “Growth in emerging markets was strong, driving attractive gains in Eastern Europe, Asia and the Middle East.”
And PepsiCo is working to develop some of its key beverage brands. It has all but completed a rebranding of sports drink brand Gatorade and Gorham said major changes are expected to the Tropicana juice brand later in the year.