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Pepsi profit tops f'casts, raises outlook

PepsiCo's second-quarter earnings rose to $1.36 billion, or 80 cents a share.

india Updated: Jul 14, 2006 09:54 IST

PepsiCo Inc on Thursday posted a better-than-expected 14 per cent rise in profit, boosted by noncarbonated beverages including Gatorade sports drinks and Aquafina water and strong growth in international markets such as Russia and China.

The world's No 2 soft drink company also raised its full-year outlook based on the strong first-half earnings and revenue performance, and its stock rose nearly 2 percent in morning trading.

PepsiCo, whose products also include Frito-Lay snacks and Quaker cereals, said second-quarter earnings rose to $1.36 billion, or 80 cents a share, from $1.19 billion, or 70 cents, a year earlier.

In recent weeks, worries about persistent inflation and signs of slowing economic growth have attracted investors to defensive groups such as consumer staples that generate reliable growth in a soft economy.

So far in 2006, PepsiCo's stock has risen 5 per cent and trades at 21 times expected 2006 earnings. Shares of No 1 soft drink company Coca-Cola Co have risen 7.3 per cent, with a price-to-earnings ratio of 19.

"Pepsi's stock has been strong since the first quarter in a soft market...this is one of the few premier consumer product stocks to own," wrote Citigroup analyst Bonnie Herzog in a research report. "Pepsi reported strong, high quality earnings once again and therefore we expect the momentum in the stock to continue."

PepsiCo has increasingly relied on sales growth of its noncarbonated drinks, such as water and sports drinks, and its Frito-Lay snacks division to offset weakening demand for its namesake sodas.

The company said second-quarter revenue rose 12 per cent to $8.6 billion from $7.7 billion a year earlier. Analysts' average estimate was $8.48 billion.

While overall snacks volume rose 8 percent, beverage volume jumped 10 percent.

"International is clearly carrying the torch but the US results were also solid with noncarb volumes being up," said Peter Schofield of Knott Capital, which recently raised its stake in PepsiCo to 600,000 shares from 360,000 shares.

Noncarbonated drinks, overseas help

The Pepsi Beverages North America unit saw 8 percent volume growth, helped by 23 per cent volume growth in noncarbonated drinks -- including Gatorade, Aquafina, Lipton ready-to-drink teas, Tropicana juice drinks and Propel fitness water.

Volume sales of carbonated soft drinks declined 1 per cent.

Soft drink companies have been trying to cater to consumers who have been moving from sugary soft drinks to diet versions, or to healthier low- or no-calorie beverages like water and orange juices with reduced sugar.

Sales volumes at Frito-Lay North America, the company's largest division, rose 4 per cent during the quarter, driven by 20 per cent growth in Sun Chips and also volume increases in the Lay's, Cheetos and Tostitos brands.

PepsiCo International, which includes all of PepsiCo's business outside the United States and Canada, posted 10 percent beverage volume growth led by gains in the Middle East, China, Argentina, Thailand and Russia. Snacks volume grew 11 per cent boosted by double-digit growth in Russia, Turkey, Egypt, Australia and India.

Looking ahead, PepsiCo lifted its forecast for 2006 earnings to at least $2.95 a share from a prior forecast of at least $2.93. The raised outlook was still a penny lower than Wall Street expectations of $2.96 a share, according to Reuters Estimates.

"The management team has been conservative on its guidance, and people may be questioning why they are not following through some of this upside to the year's forecast," said Walter Todd, portfolio manager at Greenwood Capital Management, which owns 212,000 PepsiCo shares.

But Knott Capital's Schofield said there's little to worry in PepsiCo's outlook.

"The Street numbers for the year are just reflective of the fact that the company performance has been so good that you tend to build in each quarter a little bit of a positive surprise," Schofield said.

Pepsico shares rose $1.16 to $62.26 in morning trading on the New York Stock Exchange.