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Stock Analyst Update

Pepsi Pumps Up Profits

Quaker is a wild card, but this stock looks good regardless.

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What Happened?
Soft-drink and snack-food giant PepsiCo (PEP) reported solid results in line with Wall Street expectations Monday, with fourth-quarter earnings growth of 15% and revenue growth of 8%. The company's Frito-Lay divisions (which now account for more than 60% of revenue) continued to generate double-digit profit growth, and Pepsi-Cola North America turned in a particularly impressive performance, with 15% sales growth and a 23% operating margin. However, Pepsi-Cola International had another lackluster showing, with revenue declining 4% from a year ago. The company said it's comfortable with current Wall Street projections, which call for 12%-13% earnings growth in 2001.

What It Means for Investors
PepsiCo is coming off a great year in which it capitalized on the troubles of its arch rival, Coca-Cola (KO), and we continue to think it makes a great core holding. While Coke has been restructuring and struggling with reduced earnings, Pepsi has kept on rolling with renewed focus, generating $2.7 billion in free cash flow and a return on equity better than 30% in 2000. Not only has it kept its core snack-food and soft-drink businesses highly profitable, it has strengthened its position in the fast-growing market for sports and energy drinks through its acquisition of SoBe and its forthcoming purchase of Quaker Oats (OAT), maker of Gatorade.

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David Kathman does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.