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Investors are also worried that PepsiCo may not have a pipeline of innovative products to keep sales growth intact. Granted, the jury is still out on recently launched new drinks like G2, a low-calorie version of Gatorade that was advertised during the Super Bowl. We'll learn more about its success when first-quarter results come out. But in its conference call, the company said the product is having a "strong start."
It also recently rolled out a reduced-calorie vitamin drink called SoBe Life Water that's meant to compete with Coca-Cola's (KO, news, msgs) Vitaminwater. And a new version of its AMP energy drink is being promoted by NASCAR star Dale Earnhardt Jr.
Meanwhile, PepsiCo's Frito-Lay division "appears to have plenty in the pipeline, such as True North, a nut-based chip," Hott says. Maybe all these products won't be hits. But PepsiCo has been such a master at this game for years that it seems odd to think it would suddenly have a string of failures.
Abroad, PepsiCo continues to show a knack for adapting its snack lines to local tastes, with products such as sausage-flavored Lay's in Russia and yogurt- and garlic-flavored snacks in Turkey. This is one reason international growth has been strong. Sales were up 10% abroad last quarter before acquisitions, with double-digit growth in Russia, the Middle East, China, Brazil, Argentina and India. (The growth is net of currency translations.)
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PepsiCo also continues to use its strong cash flow from more-mature North American markets to help fund acquisitions in Brazil, Bulgaria, Ukraine and other emerging-market countries. "The overseas markets are really the growth engine for that company for probably the next 10 years," Knott Capital's Barron says.
PepsiAmericas
PepsiAmericas is in many ways a mirror image of PepsiCo, minus the salty snacks. The bottler's growth will come mainly from using cash generated in mature North American markets to expand abroad. This is no easy task given Coca Cola's extensive global distribution network, which dominates the soft-drink space.But PepsiAmericas is making decent progress, especially in Central Europe. The company entered Ukraine last year by purchasing juice company Sandora in a joint venture with PepsiCo. PepsiAmericas also got a foothold in Bulgaria last year through another joint venture.
These moves provide good exposure to healthy growth in Central and Eastern Europe, reported Alexander Ware, PepsiAmericas' finance chief, in a recent interview with me. "There is lots of direct foreign investment going into these markets. They have very strong growth rates, and unemployment levels are falling to historic lows," Ware says.
Juice company Sandora, for example, reaches 90% of outlets selling beverages in Ukraine. "Over time, we can add teas and waters and soft drinks to build out that business and take advantage of all the strong macro-trends there," Ware says.
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Growth in Central Europe should remain strong for several years as PepsiAmericas rolls out new products and buys other beverage distributors. The company says the region will contribute as much as 40% of operating profits by 2010, compared with 23% now.
For this year, the company expects overall revenue growth of 13% to 15%. About half that will come from acquisitions, with the rest coming from 2%-to-3% volume growth and price increases of 4.5% to 5.5%. It should all add up to earnings growth of 7% to 10%, which should capture the investors' attention if the U.S. continues to see sluggish economic growth, as many economists forecast.
At the time of publication, Michael Brush owned or controlled no shares of companies mentioned in this column.
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