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Analyst Blog

On Apr 4, we maintained a Neutral recommendation on PepsiCo, Inc (PEP - Analyst Report), following solid fourth-quarter results. PepsiCo carries a Zacks Rank #3 (Hold).

Why the Neutral Recommendation?

PepsiCo reported impressive fourth-quarter results beating the Zacks Consensus Estimate for both revenues and earnings. Earnings, however, declined 5% year over year due to 1% shortfall in revenues. However, organic revenues increased 5% driven by a balanced growth in volume and price. Impressive performance of the Americas Foods business, due to successful innovations and increased advertising and marketing investments boost sales in the quarter.

Moreover, the company provided an impressive outlook for 2013, which was in line with long-term targets and also increased its dividend rate.

Overall, we are encouraged by the company’s strong brand portfolio, its product and geographic diversity and solid cash flow generation. 2012 was a turning point for PepsiCo with increased investments behind brand building, market execution and innovation and improved productivity that are expected to set the foundation for further growth and competitive advantage.

However, we prefer to remain on the sidelines until we see some meaningful impact of these investments on the operating results.

Moreover, a challenging consumer spending environment and continued sluggishness in the North American beverage business concern us. Changing consumer preferences, increasing health consciousness, rising obesity concerns, possible new taxes on sugar-sweetened beverages and growing regulatory pressures are affecting the company’s carbonated beverage sales. Though PepsiCo has increased marketing investments to boost its American beverage business, we prefer to wait until we see a substantial turnaround. Strong competition from The Coca-Cola Company (KO - Analyst Report) for beverages has also been a persistent overhang.

Other Stocks to Consider

A stock in the beverage industry that is currently performing well is Coca-Cola Hellenic Bottling Company S.A. - Zacks Rank #2 (Buy). In the broader consumer staples sector, food company, Flower Foods, Inc. (FLO - Snapshot Report) is worth mentioning, carrying a Zacks Rank #1 (Strong Buy).

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