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PepsiCo (NYSE:PEP) is scheduled to report its first quarter earnings before the bell on Thursday morning, and the bar does not seem to be set too high. Over the past few quarters, PEP has been confronted with a plethora of problems, ranging from higher commodity and food costs to product roll-out problems, as well as the decision to concentrate on products that are "good for you," instead of trying to prop up the moneymakers that include the carbonated soft drink division.

Quaker Foods North America (QFNA) has been a sore spot for the company for the past several quarters as volumes have been weak. However, higher commodity costs have been partially offset by the pricing power strength for the segment. It has been the strength in Europe (which has been helped by the Wimm Bill Dann acquisition) that has helped the company's volume figures. Below is a table of the volume growth for the various segments over the past two quarters (3Q11 and 4Q11).

Volume

4Q11

3Q11

FLNA

1.0%

1.0%

QFNA

(9.0%)

(4.5%)

LAF

6.0%

3.5%

PAF

1.0%

1.0%

PAB

(1.5%)

0.0%

Europe Snack

36.0%

35.0%

Europe Beverage

22.0%

13.0%

AMEA Snack

15.0%

16.0%

AMEA Beverage

30.0%

6.0%

Total Snack

8.0%

8.0%

Total Beverage

3.0%

4.0%

Operating margin was a problem for PEP's main competitor, the Coca-Cola Company (NYSE:KO). During its first quarter of 2012, KO saw total operating margin decline slightly year over year, with four of the six segments seeing declines. Click here to view my KO earnings reaction. Now, PEP has increased exposure to more commodities, so its risk is a little higher. PEP has seen its operating margin decline in each of the past two quarters (compared to the previous year), and I am expecting another small decline this quarter, roughly inline with that of KO.

The Street is looking for PEP to earn $0.67 per share on revenue of $12.36 billion. Earnings per share estimates have been falling over the past 90 days as a result of higher commodity costs and continued softness in various economies around the world (namely Europe). The Wimm-Bill-Dann acquisition occurred during the third quarter of 2011, so PEP has another two quarters of easier comparisons in Europe. As a result, I am expecting earnings to be slightly higher than the Street is expecting, earnings $0.69 per share on slightly higher revenue of $12.39 billion. Pepsi Americas Beverage (PAB) saw volumes decline 1.5% during the fourth quarter of 2011 and was flat during the third quarter. I am expecting a flat to slightly higher figure for the quarter. Volumes in the U.S. have stabilized as gasoline prices have stabilized. Additionally, I am looking for Frito-Lay North America (FLNA) and Latin America Foods (LAF) to more than offset the volume decline in QFNA.

I prefer shares of KO as a result of its strong growth overseas, particularly in China. Pepsi recently opened a new plant in China, but they are still playing catch up to KO. That being said, I think PEP is a solid dividend play, but will not see the capital appreciation that KO has enjoyed.

Disclosure: I am long KO.

Source: Earnings Preview: PepsiCo

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