PEP PepsiCo Inc

By Steven Russolillo 

The cola wars have turned from a stalemate to a rout recently.

Over the past five years, PepsiCo shares have beaten those of Coca-Cola Co. by 50 percentage points. By diversifying its business, the snack-and-beverage giant's sales and volumes have risen along with 15 consecutive quarters of profit margin expansion. Last year, PepsiCo even successfully fended off activist investor Nelson Peltz , who called for a breakup of the company.

PepsiCo is set to report fourth-quarter earnings on Wednesday and the numbers should be just fine. Analysts surveyed by FactSet expect earnings of $1.16 a share, up 9.4% from a year earlier. PepsiCo has exceeded expectations every quarter over at least the past five years. Revenue is forecast to have increased 4.9% to $19.5 billion, accelerating for the first time in nine quarters.

Are the stock's best days behind it, though? PepsiCo shares hit a record over the summer, right as investors' thirst for yield was peaking, but have struggled ever since. The stock is down since the November presidential election, underperforming the S&P 500 by 11 percentage points as the market has raced to records.

While PepsiCo's profitability has been boosted by cost cuts and price increases, the fact remains that it still gets almost half of its revenue from outside the U.S. That includes countries with weak currencies, such as Mexico, Russia, the U.K. and Brazil.

PepsiCo's international exposure, particularly in today's political environment, makes it more vulnerable to earnings turbulence than domestically focused peers. Mexico and Russia are two of PepsiCo's biggest revenue drivers outside of the U.S. In 2015, they represented 10% of the company's sales, down from 15% in 2011.

Even rival Dr Pepper Snapple Group Inc., which is more domestically oriented than PepsiCo and Coke, warned Tuesday that its profit this year would be pressured by the weak Mexican peso. Dr Pepper Snapple gets roughly 8% of its sales from Mexico and the Caribbean, according to its most recent annual report.

Meanwhile, PepsiCo's focus on waistlines has been less stellar than its bottom line, creating some risks. Chief Executive Indra Nooyi has stated she wants the maker of Lay's potato chips, Fritos and Cheetos to be a truly health-conscious company, but PepsiCo is learning consumers remain infatuated with chips.

The company has fallen behind a prior target of tripling revenue from nutritious products to $30 billion this decade. PepsiCo's products have added more sugars, despite threats from many countries to tax or curb sugar consumption. In October the company reframed its health target, saying it hopes sales growth of its nutritious products "will outpace" the rest of its portfolio by 2025.

All of this comes as PepsiCo shares trade at a rather bubbly 20 times projected earnings over the next 12 months, near the 12-year high it hit over the summer and about one-fifth above its average over the past decade. Switching cola brands might not be the answer, either, as Coke's multiple is even richer.

Leave them both on the shelf.

(END) Dow Jones Newswires

February 14, 2017 15:31 ET (20:31 GMT)

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