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Shares of PepsiCo (PEP) ended the week largely unchanged. The global food and beverage company reported its third quarter results on Wednesday before the market open.

Third Quarter Results

PepsiCo reported third quarter revenues of $16.65 billion, down 5% on the year. The strong dollar relative to major other international currencies had an adverse effect of 5% on total revenues. Beverage refranchising in China and Mexico impacted revenues by another 5%. Analysts expected the company to report revenues of $16.9 billion.

The company reported net earnings of $1.91 billion, or $1.21 per diluted share. This compares to earnings of $1.25 per share last year. Core earnings per share came in at $1.20 per share, compared to $1.31 last year. Core earnings were impacted by $83 million in restructuring charges during the quarter, as part of a multi-year productivity program. Both reported net earnings and core earnings, beat analysts consensus of $1.16 per share.

CEO and Chairman Indra Nooyi commented on the results, "PepsiCo is diligently executing the strategy we set forth at the start of the year, and we remain on track to achieve our full-year targets. Our disciplined pricing and sustained investment in brand building drove 5 percent organic net revenue growth reflecting 1 percent organic volume growth and 4 percent effective net pricing. We remain focused on our five priorities. We will continue to invest aggressively to build our brands, accelerate innovation to drive growth, focus on execution and deliver our productivity agenda while returning cash to shareholders."

Outlook

For the full year of 2012, PepsiCo reiterated its forecast of a decline in core constant currency earnings per share of 5% compared to 2011s core earnings of $4.40 per share. Current foreign exchange rates imply an unfavorable impact of three percentage points of full year core earnings.

Segmental Information

Frito-Lay

Revenues at Frito-Lay rose 3% to $3.27 billion. Revenues were driven by a 2% increase in pricing and a 1% increase in volumes. Operating profits came in unchanged at $917 million as a result of an increase in commodity costs. The benefit of higher prices was offset by higher advertising and marketing expenses.

Quaker Foods

Revenues came in unchanged at $615 million. Volume growth of 2% was offset by unfavorable pricing and product mix. Higher commodity costs and increased advertising expenses resulted in a 13% decline in operating income to $154 million.

Latin America Foods

Revenues in Latin America rose 2% to $1.88 billion. In constant currencies revenues were up 13%. Prices increased 9%, while the division reported a 4% volume growth. Unfavorable foreign exchange rates had a 13% negative impact on revenues. Operating income fell 21% to $219 million on commodity cost inflation and higher marketing and advertising expenses.

PepsiCo American Beverages

Revenues for the American Beverages fell 7% to $5.53 billion. The impact of refranchising the Mexican division shaved of 6% of total revenues. The 3% increase in pricing was offset by a 3% decrease in volumes. Operating income fell 16% to $837 million as a result of higher commodity costs and higher advertising and marketing expenses.

Europe

Revenues for the European division fell 6% to $3.69 billion. A 6% increase in pricing was more than offset by a 12% unfavorable effect of a weaker Euro and other currencies versus the dollar. Strong growth in Russia was offset by weaker sales in the rest of Western Europe. In constant currencies, operating profit rose 3% as productivity initiatives offset higher marketing expenses and commodity costs. Operating income fell 6% to $483 million.

Asia, Middle-East and Africa

Revenues fell 21% to $1.66 billion. The refranchising of bottling operations in China cut revenues by 27%. Organic revenues in the other operations rose by 10%. Operating profits rose 14% driven by volume growth.

Valuation

PepsiCo ended its third quarter with $5.7 billion in cash, equivalents and short term investments. The company operates with $27.9 billion in short and long term debt, for a net debt position of $22.2 billion.

For the first nine months of 2012, PepsiCo generated revenues of $45.5 billion. The company net earned $4.52 billion, or $2.86 per diluted share. For the full year, PepsiCo is expected to generate annual revenues of $65 billion. The company could earn $6.6 billion, or $4.20 in core earnings.

The market currently values PepsiCo at $108 billion. This values the firm at 1.7 times annual revenues and 16 times annual earnings.

PepsiCo currently pays a quarterly dividend of $0.5375 per share, for an annual dividend yield of 3.1%.

Investment Thesis

Year to date, shares of PepsiCo have risen a mere 5%. Shares started the year at $66 per share and fell back to $63 in March of the year. Shares steadily rose to highs of $73 during the summer, and are currently exchanging hands at $70 per share.

Over the last five years, shares are trading unchanged. Shares fell from $80 at the end of 2008 and fell to lows of $50 in the beginning of 2009. Between 2008 and 2012 the company grew its annual revenues from $43.3 billion to an estimated $65 billion. Profits increased from $5.1 billion to an estimated $6.6 billion, based on core earnings.

Despite the operational and profitability issues PepsiCo is currently facing, it returns a lot of cash to its shareholders. For the full year of 2012, the company is expected to repurchase for $3 billion worth of shares, and pay out $3.3 billion in dividends. This is equivalent to cash flows to shareholders approaching 6% per annum.

For long term investors who favor capital gains in combination with dividend yields, I prefer Coca-Cola (KO) in the global beverage industry. Coca-Cola operates with much less debt, pays a similar dividend yield, and has more competitive operations. Furthermore shares returned some 20% over the past five years, while shares of PepsiCo have hardly moved. Both competitors trade at similar earnings multiples.

Source: PepsiCo - Least Preferred Beverage Company Amidst Debt Load And Operational Issues