This year, the market has been buzzing with acquisition rumors about the food and beverage major PepsiCo, Inc. (NYSE:PEP). Be it a potential merger of the company’s snacks division with Mondelez International Inc (NASDAQ:MDLZ) or a hypothetical takeover of Sodastream International Ltd (NASDAQ:SODA), there has been no dearth of excitement. PepsiCo’s astute strategies have created some solid catalysts which can set the stock soaring.
These key drivers include PepsiCo, Inc. (NYSE:PEP)’s thriving snacks business, its beverage distribution partnership with Tingyi in China, and its presence in fast growing emerging and developing markets. These these catalysts powered the company to deliver solid second-quarter beats both on the top line and the bottom line.
This was PepsiCo, Inc. (NYSE:PEP)’s sixth consecutive quarter of mid-single-digit organic revenue growth, which came in at 4.2%. Globally organic volume increased 3% in snacks and 1.5% in beverages. Reported revenue was up 2% to $16.81 billion just ahead of analysts’ expectations of $16.79 billion. Through impressive cost cutting and operating leverage, the company translated these gains into an 8% increase in operating profit in constant currency. Net income was $2.01 billion or $1.28 per share. Stripping unusual items, income came in at $1.31 per share, miles ahead of analysts’ projections of $1.19 per share.
Snacks are an incredible opportunity for PepsiCo, Inc. (NYSE:PEP), particularly in developing and emerging markets. Demand for snacks increases as economic conditions improve for consumers. Since snacks are generally not a necessity it takes some time for people to adapt. Luckily for PepsiCo, the big populations in China and India and also those in other evolving markets like Mexico, Russia, etc, are in that adapting phase.
PepsiCo, Inc. (NYSE:PEP) reported excellent volume growth in snacks during the second quarter in the developing and emerging markets. Overall volumes were up 11% in these markets, led by 23% growth in China.
EMEA saw 6% growth. East Europe, especially Russia, has emerged as a snacks hub for PepsiCo. The company’s bread based snack, Hrusteam, is a hot favorite in Russia. Lay’s chips are available in flavors like caviar and crab are also noteworthy.
PepsiCo, Inc. (NYSE:PEP) is driving modest growth in the matured markets through product innovations. Frito-Lay North America saw 3% volume growth and the company increased its market share. Quaker, however, saw some weakness on account of soft demand for oatmeal.
Let’s also see how the other big snacks maker, Mondelez International Inc (NASDAQ:MDLZ), is faring with merger rumors making rounds. The company was formed out of the Kraft Foods snacks division last fall. Mondelez has nine $1 billion-brands including Oreo and Cadbury’s and enjoys solid popularity in big emerging markets like China and India.
However, the company’s revenue growth of 1% and slide in profits from $813 million to $568 million in the first quarter has not been inspiring. The market is still optimistic about the company and looking forward to the second quarter results to be released next week. The Mondelez International Inc (NASDAQ:MDLZ) results will also be important for PepsiCo, Inc. (NYSE:PEP) especially if the merger proposition starts gaining ground.
Beverage deal in China
PepsiCo, Inc. (NYSE:PEP) has hit a jackpot in China with its distribution deal with Tingyi, the country’s leading food and beverage maker. The deal allows PepsiCo to use Tingyi’s unparalleled distribution network in the country to distribute all its drinks. Distribution is a problem in China and this is where PepsiCo has cornered its arch rival The Coca-Cola Company (NYSE:KO). The latter witnessed flat sales in China in the second quarter, while the former posted a dazzling 22% beverage volume growth.
Coca-Cola has had a rough second quarter. Without an alternate business line like PepsiCo, Inc. (NYSE:PEP)’s snacks, the company found itself at the mercy of an unusually wet and chilly spring in North America, which hurt beverage sales. Revenue slipped 3% to $12.75 billion and earnings of $0.61 per share just matched expectations.
Coca-Cola still has a lot to offer its investors: growing non-carbonated business, leadership position in most of its markets, and above all an incredible brand. However, the current results show that it needs to gather its strength together and deliver better.