Pepsi's Costs May Put a Cap on Profit

PURCHASE, N.Y. ( TheStreet) -- When PepsiCo ( PEP) reports quarterly earnings Wednesday, investors will pay close attention to word from the beverage and snack company on consumer demand and pricing.

Pepsi

Analysts expect Pepsi to have earned a profit of $2.08 billion, or $1.30 a share, in its fiscal third quarter ended Sept. 30, up 9.5% from $1.9 billion, or an adjusted $1.22 a share, earned in the year-earlier quarter. Revenue is expected to have grown 10.9% to $17.19 billion from $15.5 billion. Pepsi's report is due ahead of the opening bell Wednesday.


In July , Pepsi lowered its guidance for the year citing soft consumer demand in developed markets like North America, while input costs for commodities and fuel were rising. To offset these rising costs, Pepsi said it would implement previously announced incremental price increases. It forecast high-single-digit EPS growth on a core, 52-week basis, compared with a fiscal 2010 profit of $4.13 a share. Analysts at the time expected Pepsi to earn $4.50 a share for fiscal 2011, but the consensus has since dropped to $4.41.

While demand in developed markets has waned somewhat, the opposite is true in emerging markets like Brazil, Russia and India where disposable income among consumers is growing. Pepsi's exclusive contract with Yum! Brands ( YUM) to serve Pepsi products in its restaurants also helps, particularly in the fast-growing market of China. Yum, which operates Taco Bell, Pizza Hut and KFC restaurants, last week matched quarterly profit expectations as continued strong performance in China drove year-over-year revenue growth of more than 14%.


As of earlier this year , Pepsi had been able to manage the risk of rising commodity costs better than Coca-Cola ( KO). Pepsi had turned to improved operational efficiencies and price increases to help offset those costs, but Chief Financial Officer Hugh Johnston conceded in April that pricing in the first half of the year "has not been what we would have liked or expected."

Costs for plastic bottles and fuel to transport beverages have risen as oil prices heated up this year. Oil prices affect the price of polyethylene terephthalate, or PET, the plastic used by beverage companies to make soda bottles. Coke, Pepsi, Dr Pepper Snapple ( DPS) and other beverage makers cannot hedge the prices they pay for PET because the material is not traded like other commodities.


Over the last three months, Coke shares have fallen less than 3%, while Pepsi lost around 11.5%. Dr Pepper Snapple's stock is lower by around 5.3% in the same period.

Pepsi shares were 1.4% lower at $61 in trading Tuesday ahead of Wednesday's earnings report.


-- Written by Miriam Marcus Reimer in New York.

>To contact the writer of this article, click here: Miriam Reimer.

>To follow the writer on Twitter, go to @miriamsmarket.

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