PepsiCo, Inc. (PEP): Half Is Doing Great

I hate to burst everyone’s bubble, but I was not as impressed with PepsiCo, Inc. (NYSE:PEP)‘srecent earnings as apparently the market was. With the stock up 5.6% from its price before earnings, it makes sense to examine what makes this company worth an extra $6 billion in market capitalization. I hate to say it Pepsi fans, but there are three issues that Pepsi still hasn’t solved.

High Priced Beverages
If there is one thing I’m sure of, it’s that there are no bargains in the beverage bin of the stock market. In fact, I would argue that the only more expensive corner of the market is the utilities industry. Both of these industries I believe are being Dr Pepper Snapple Group Inc. (NYSE:DPS)iven by uninformed investors seeking yields they can’t get elsewhere.

If you ask the average investor about safe investments, you’ll likely get stocks from the utilities segment and the beverage segment. Specifically, I’ll bet you would heard The Coca-Cola Company (NYSE:KO), PepsiCo, and Dr Pepper Snapple Group Inc. (NYSE:DPS) mentioned. If you talked to an investor more focused on growth stocks, you might hear these companies along with Monster Beverage Corp (NASDAQ:MNST).

There are two problems in the beverage industry today. First, the growth rate in volumes is slowing down across the board. Second, investors think they are buying safe stocks with better than average yields, but may not realize the risk they are taking on. Most of these companies are expected to grow at a rate significantly slower than just five or ten years ago, yet investors are paying up for the shares like nothing has changed.

High Prices Apparently Don’t Apply To Just These Stocks
Looking through PepsiCo, Inc. (NYSE:PEP)’s earnings, one thing that jumped out at me was the company’s reported revenue and earnings versus what they called “core constant currency” results. For instance, reported net income was actually down 3%, but PepsiCo, Inc. (NYSE:PEP) said that core EPS was up 12%. I think these adjusted results are designed to mask the company’s real challenges of slow organic growth.

For instance, the company’s Latin American results were driven by a 13% price increase and just 1% of volume growth. This huge price increase isn’t likely repeatable. By comparison, The Coca-Cola Company (NYSE:KO) saw 4% volume growth in Latin America. The bottom line is, Coca-Cola had four times the real growth in Latin America.

Problems At Home
One problem PepsiCo, Inc. (NYSE:PEP) doesn’t seem to have an answer for is, how to grow their North American business. Look at a comparison of Pepsi’s results versus their competition: