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Pepsi Set to Redeem Faith in Soft Drink Business

NEW YORK ( TheStreet) -- PepsiCo (PEP), long criticized for neglecting its soft drinks and focusing excessively on building a healthy snacks portfolio, may finally see a turnaround in 2012, suggested by recent good news related to its soft drinks sales.


With initial sales of Pepsi Next better than expected and the company ready to spend an additional $600 million on advertisements in 2012, we could see a revival of its carbonated soft drink sales. PepsiCo competes with leading food and beverage companies around the world including Kraft Foods (KFT) Coca-Cola (KO) and Dr Pepper Snapple (DPS).

We maintain a price estimate of $69, which is about 5% above the current market price.

See our complete analysis of PepsiCo.

Hope Alive for Pepsi Brand

PepsiCo struck two major deals in April. First, it signed an agreement with DineEquity, which owns Applebee's as well as IHOP, allowing Pepsi to become the exclusive provider for the two restaurant chains. Currently, Pepsi is served in about 90% of Applebee's restaurants and half of IHOP's outlets.

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The second deal saw PepsiCo signing a multi-year agreement with Family Dollar stores, allowing Pepsi to be sold in its 7,100 stores across America. Both these deals give the beverage a much needed boost.

For Pepsi Next, the initial sales data suggests that the mid-calorie soft drink's performance has been better than anticipated, with the company claiming that the beverage is attracting new customers into the cola category. However, it is too early to comment on how the beverage will perform in the long run. Initial sales can be misleading as consumers often buy products on hype.

Earlier this year, Pepsi tied up with Nicki Minaj, which will see the singer as brand ambassador for the drink. The first commercial is scheduled for launch next week as part of Pepsi's global campaign "Live for Now." Although Pepsi has been consistently losing market share in the U.S. carbonated soft drink market, we estimate this year could be different, and we expect Pepsi to maintain its market share.

2012 Guidance Reaffirmed

During the recent earnings call for first-quarter results, PepsiCo reaffirmed its full-year guidance of earnings of $4.40 per share, which is a drop of 5% over 2011. The management cited increased marketing spend as well as restructuring costs related to laying off 8,700 workers as reasons for the drop in EPS.

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This commentary comes from an independent investor or market observer as part of TheStreet guest contributor program. The views expressed are those of the author and do not necessarily represent the views of TheStreet or its management.

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