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On May 21, we maintained a Neutral recommendation on the food and beverage giant, PepsiCo, Inc. (PEP - Analyst Report) on the back of solid first-quarter 2013 results. However, sluggishness in the American beverage business is a concern.

Why the Neutral Recommendation?

PepsiCo’s first-quarter earnings of 77 cents beat both the Zacks Consensus Estimate as well as the year-ago results driven by productivity gains from restructuring activities, strong margins as well as solid organic top-line growth. Organic revenues increased 4.4% driven largely by strong performance of snacks and encouraging international growth. PepsiCo is boosting its existing brands and categories with stepped-up marketing and innovations which is driving organic revenue growth and market share gains. The company also retained its 2013 outlook.

Following the solid first-quarter results, the estimate revisions were mostly biased upwards. The Zacks Consensus Estimate for 2013 rose 0.5% to $4.41 per share while that for 2014 increased 0.2% to $4.79 over the last 60 days. In fact, PepsiCo has beaten the Zacks Consensus Estimate continuously for the past four quarters.

Overall, we are encouraged by the company’s strong brand portfolio, its product and geographic diversity and solid cash flow generation. Year 2012 was a turning point for PepsiCo. In this year the company increased its investments in brand building, market execution and innovation, improved productivity and efficiency, and drove significant cash flow generation. All these initiatives will not only intensify its foundation for further growth but also give the company a competitive advantage over its peers.

However, we prefer to remain on the sidelines until we see some meaningful impact of these investments on the operating results. Moreover, the company’s North American beverage business has been consistently delivering sluggish results, especially the colas. 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 and is driving package and product innovation to boost its American beverage business, we prefer to wait until we see a substantial turnaround. The continuously challenged consumer spending environment is another negative factor.

PepsiCo currently carries a Zacks Rank #3 (Hold). Rival, The Coca-Cola Company (KO - Analyst Report), carries a Zacks Rank #2 (Buy). Other consumer staples companies that are currently doing well include Flower Foods, Inc. (FLO - Snapshot Report), carrying a Zacks Rank #1 (Buy) and General Mills, Inc.(GIS - Analyst Report), carrying a Zacks Rank #2 (Buy).

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