PepsiCo Gains on Earnings News

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By Louise Kramer
Staff Reporter

After abstaining for the past few weeks, investors gulped up

PepsiCo

(PEP) - Get Report

Tuesday following the preopening release of an earnings report that essentially met expectations.

The beverage, snack food and restaurant conglomerate reported second-quarter earnings of 42 cents per share versus 36 cents for the same quarter a year ago. When stripped of one-time earnings boosters -- including the selloff of a business and income from restaurant refranchising -- the number pegged the

First Call

consensus estimate of 37 cents.

"I think they were very much in line, but the market was obviously starting to get worried about it in the last couple of weeks," says Caroline Levy, who tracks the company for

Schroder & Co.

(formerly Schroder Wertheim) and has an outperform rating on the stock. Her firm has done no recent underwriting for Pepsi.

The stock closed up 2 1/2 at 38 1/16 on heavy volume amid the broader market's

Greenspan

-inspired surge.

Mitch Pinheiro, an analyst with

Janney Montgomery Scott

in Philadelphia, says he was surprised at the price jump given only single-digit sales increases in the company's North American beverage and snack foods divisions. "I don't know what all the hubbub is about," says Pinheiro. He has a hold recommendation on the stock and his firm has done no underwriting for the company.

Beverage sales were up 2% in North America compared with a 13% increase for the year-ago quarter, while sales of snack foods in North America were up 4%. "I'm absolutely surprised that 2 percent or 3 percent volume growth in the beverage business in the U.S. doesn't concern people," he says. "I'm just surprised the stock is up as strongly as it is. And with Frito-Lay, I'm used to seeing double-digit growth," he says of the snack foods business. Frito-Lay has had three years in a row of sales increases above 10%, he notes.

In a midday conference call with analysts -- some 250 bankers and investors were on the line -- PepsiCo indicated it's on target to meet expectations for the year. The First Call consensus predicts 1997 earnings of $1.47 per share. That's good news, says David Goldman, who tracks Pepsi for

Robinson-Humphrey

in Atlanta. His firm has done no underwriting for the company.

"The past two years, with the exception of the first quarter

of 1997, have been disappointing," he says, adding that 1997 would be the first time in two years the company may meet or beat expectations. "Why is the stock up two and change? People want to believe," he says.

Here are some tidbits from the conference call and interviews with analysts Tuesday:

The company expects continued discounting of soft drinks for the important Labor Day holiday, but a firming-up of prices after that. "A number of issues are behind them with very weak soft-drink pricing," says Goldman. "That speaks for a much stronger second half."

Ailing

Pizza Hut

, one of the three fast-food chains the company is slated to spin off in the fourth quarter, has started to show signs of improvement. Same-store sales have been in positive territory for the concept so far this quarter. That follows a dip of 5% for the second quarter, which was an improvement over last year's 8% decline. A new ad campaign launched in late April under the concept's new president, David Novak -- he's been tapped as president of

Tricon

, the restaurant spinoff -- helped fuel sales.

PepsiCo will call Tricon, the restaurant group comprising Pizza Hut,

KFC

and

Taco Bell

, a discontinued business in the third quarter, and will absolve it of corporate overhead expenses of about $63 million.

Consumers are lapping up

Frappuccino

, the coffee drink from

Starbucks

(SBUX) - Get Report

that Pepsi is bottling and distributing. "We can't make enough," Margaret Moore, vice president of investor relations, told conference callers. "We sell everything we make as fast as we can make it." Starbucks is slated to announce its earnings after the close Thursday.