Credit: Shutterstock photoLeading beverage and snacks manufacturer, PepsiCo ( PEP ) is scheduled to announce its Q1 earnings on April 17. Unfavorable weather conditions and headwinds in the core carbonated soft drinks ( CSD ) category are expected to weigh on the company's financials. Beverage volumes for PepsiCo's Americas division, which has historically contributed around one-thirds to the net revenues, fell by 3% year-over-year in 2013. As health and wellness concerns continue to dissuade consumers from soft drink consumption, the trend of declining soda sales is expected to continue this year. However, more than half of PepsiCo's revenues in the last couple of years have come from its booming snacks division. According to our estimates, snacks constitute almost two-thirds of the company's valuation. While domestic beverage sales have disappointed in the last few years, sales for the snacks division have risen by 27% in the last four years. The company now hopes to build on its food momentum, and expects two-thirds of its growth to come from the snacks business (division-wise) this year. In addition, PepsiCo also aims to derive two-thirds of its growth from emerging economies (geography-wise) this year. The company's volumes in Asia, Middle East and Africa rose 5% in 2013, representing the highest year-over-year increase from any region for PepsiCo.
We estimate a $87 price for PepsiCo , which is around 5% above the current market price.
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Domestic CSD Woes Are Expected To Continue
While the U.S. liquid refreshment beverages (LRB) market remained flat last year, after three consecutive years of growth, CSD volumes fell by 3.2% to less than 13 billion gallons. But what hurt PepsiCo most was relinquishing market share to its chief competitors The Coca-Cola Company ( KO ) and Dr Pepper Snapple ( DPS ) in the U.S. According to a research report by Wells Fargo Securities, dollar sales for CSD decreased by 1.9% in the first quarter this year. Although the flagship drink Pepsi registered a 4% rise in unit sales, unit prices fell 3.6%, meaning flat dollar sales.
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Quaker Foods Could Continue To Decline
North American sales for Frito-Lay and Quaker Foods constituted half of the food sales and one-fourth of the overall sales for the PepsiCo in 2013. But while revenues for Frito-Lay North America have increased 14% in the last five years to over $14 billion, Quaker Foods has seen a decline of 3% in sales to $2.6 billion during the same period. Last year, sales of Quaker Foods remained flat. Shifting trends in the breakfast market have hurt Quaker Food volumes, which sells hot and cold cereals, snack bars, rice snacks and cookies. Traditional American breakfasts such as oatmeal and sugar cereals are losing customers to quick-service restaurants and dairy products such as yogurt. This trend is expected to continue in this quarter as well.
However, going forward, Quaker will hope to make inroads in the budding yogurt market, in partnership with the Theo Muller Group. Yogurt constitutes 40% of the breakfast market and continues to outperform the entire category. The yogurt and sour milk products market is expected to grow by 10% to $9.3 billion by 2018. According to PepsiCo, fueled by the growing demand for Greek yogurt, the Muller yogurt is on its way to generate annual sales of $100 million in the domestic market. This anticipated growth in the dairy market could add meaningful growth to PepsiCo's top line this year.
Latin America Foods To Be Hit By Mexico Tax
Snacks in Latin America contributed 13% to PepsiCo's net revenues last year. This division witnessed a 7% rise in sales and a 2% volume growth, bolstered by a low single-digit growth in Mexico. PepsiCo announced a $5 billion investment in Mexico earlier this year, in addition to the $3 billion already invested since 2009, in a bid to further expand into the country. However, the Mexican government passed a "junk food tax" late last year, to entail an 8% rise in prices of foods with high amounts of saturated fat, sugar and salt. This price rise is expected to lower demand for Sabritas, the brand under which the company sells its Frito-lay snacks, as well as other products specific to the Mexican market.
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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.
