PepsiCo to raise prices; maintains forecast

PepsiCo Inc is planning to raise prices on some Gatorade sports drinks and Frito-Lay snacks in coming weeks to help offset higher commodity costs.

Those increases, on top of other increases taken earlier this year, are helping the company stand by its full-year earnings growth target, despite a smaller-than-expected boost from foreign exchange rates.

The maker of Pepsi-Cola, Frito-Lay snacks and Quaker oatmeal also reported slightly better-than-expected third-quarter earnings on Wednesday, sending shares up 4 percent.

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The company cited a lower tax rate and cost-savings from acquisitions, which are helping it endure higher costs for commodities such as corn and wheat and weak consumer spending.

PepsiCo executives also sought to quell recent speculation on Wall Street about a possible breakup of the company, saying it has considered that option and does not find it to be in shareholders’ best interest.

“I’ve looked at every single scenario you could probably come up with in terms of how PepsiCo’s portfolio is constructed,” Chief Financial Officer Hugh Johnston told reporters. “Taking it apart, I know, would be very, very costly and I really don’t see the benefit in doing it.”

He said PepsiCo gains from having both a snacks and drinks business in areas such as back-office operations, research and development and procurement, even if the snacks and drinks are not always delivered on the same trucks.

The two units are more integrated in emerging markets, where their presence is newer. But PepsiCo said it is working to bring more of those benefits to North America, where performance has been rocky due to a weak economy and intense competition with market leader Coca-Cola Co.

Coca-Cola, whose shares were up 1.7 percent to $67.94 on Wednesday afternoon, will report earnings next Tuesday.

More price increases

In addition to price increases put through in the third quarter, PepsiCo said it would implement more in the fourth quarter, primarily on Gatorade and single-serve bags of Frito-Lay snacks, but also on select products sold overseas.

PepsiCo stood by its full-year outlook, which calls for 2011 earnings to grow at a high single-digit rate. But due to a recent strengthening of the dollar, that forecast now only includes a 1 percentage-point boost from foreign exchange, whereas the company earlier expected a 2-point boost.

The new forecast implies underlying profit growth of 6 percent to 8 percent for the year, said Stifel Nicolaus analyst Mark Swartzberg, up from 5 to 7 percent growth earlier.

Still, Swartzberg stuck by his “hold” rating on the shares, saying he does not expect the stock to move significantly higher until the company’s strategy and execution, especially in the Americas beverages business, improve.

The company declined to give any specifics regarding its outlook for 2012, saying it was still too early, given the current volatility in financial markets and global economies.

James Tierney, chief investment officer at W.P. Stewart, said it was therefore hard to gauge how PepsiCo would fare, especially when it comes to commodity inflation. Tierney’s firm used to own PepsiCo shares but does not anymore.

Even though corn prices have come down in September, PepsiCo has seen no change in its cost estimate, because of hedging, Johnston said. He also emphasized that no single commodity makes up more than 10 percent of total purchases.

PepsiCo still expects to see a rise in commodity costs this year at the high end of a $1.4 billion to $1.6 billion range.

Third-quarter net income rose to $2.0 billion, or $1.25 per share, from $1.92 billion, or $1.19 per share a year earlier.

Excluding items, earnings were $1.31 per share, topping analysts’ average estimate by a penny, according to Reuters.

Revenue climbed to $17.58 billion from $15.51 billion a year ago. Analysts on average were expecting $17.18 billion.

Total sales volume rose 8 percent in the snacks business and 4 percent in the drinks business.

Volume in the Americas Foods business rose 1 percent as gains of 1 percent at Frito-Lay North America and 3.5 percent in Latin America offset a 4.5 percent decline at Quaker Foods North America.

PepsiCo Americas Beverages volume was flat. Net revenue in that business rose 1.5 percent, helped by price increases.

The company’s shares were up 4 percent at $63.42 in afternoon trading Wednesday on the New York Stock Exchange.

Reuters