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PepsiCo Shares Rise as Company Extends Review

Tuesday, 08 Nov 2011 05:55 PM

PepsiCo Inc's management and board will extend their ongoing review of business plans for 2012 and beyond, the company said Tuesday, raising hopes of more drastic measures to reignite its sagging performance.

PepsiCo shares closed up nearly 2 percent, almost double the gain of its food and beverage peers.

James Tierney, chief investment officer at W.P. Stewart, said the market likely saw the extension as a sign that PepsiCo might be considering breaking up the company -- a move analysts have discussed in recent months.

Still, Tierney said he thinks the company just needs more time to fully assess how to re-energize its business and what resources that requires.

"As a result they just need more time to study and figure out what spending priorities in 2012 are, and what that means for the bottom line," said Tierney, who owns PepsiCo shares personally but no longer on behalf of his clients.

When the maker of Gatorade sports drink and Frito-Lay snacks released third-quarter results on Oct. 12, it declined to give any specifics regarding its 2012 outlook, saying it was still too early, given the current volatility in financial markets and global economies.

It also said then that it would host a conference call in early December to review its outlook, including its game plan for 2012 and its views on commodity costs, investments, productivity programs and foreign exchange.

In a brief statement Tuesday, PepsiCo Chief Executive Indra Nooyi said the company needed more time.

"As we have been working through our planning for 2012, we have decided that it is appropriate to extend our ongoing review," Nooyi said.

A PepsiCo spokesman declined to comment further.



Barclays Capital analyst Michael Branca said the delay will likely spur increased debate about management changes, which he thinks would be viewed "very positively" by investors.

"For quite some time investors have been very frustrated with the current management," Branca said.

Branca, who has an "overweight" rating on PepsiCo shares, said the delay also increases prospects for a "sizable reset" in earnings expectations as the company reinvests more profit into marketing and advertising. He estimates at least an additional $500 million in spending in 2012.

PepsiCo does not usually provide earnings forecasts until after the start of the year, and the delay is a return to past practices, said Stifel Nicolaus analyst Mark Swartzberg.

"On its face, a moved date is only that, especially since PepsiCo's new timing is a return to typical timing," Swartzberg said.

"However, we think the announced delay provides more evidence of PepsiCo's internal challenges as it was only a month ago that PepsiCo announced a detailed outlook before year-end," he added.

PepsiCo also said at that time that it had considered breaking up the company and did not find that to be in the best interest of its shareholders.

Also Tuesday, the New York Post reported that some members of PepsiCo's board were frustrated over the lack of a perceived management succession plan. The newspaper cited unnamed "sources close to the board."

Nooyi was named chief executive in October 2006, and since then, PepsiCo's stock has fallen 2.5 percent. By contrast, the Dow Jones U.S. Food and Beverage index gained 25 percent over the same period. The company's flagship Pepsi-Cola became the No. 3 soda in the United States last year, losing its spot as No. 2 to Diet Coke. Coca-Cola remained No. 1.

In her effort to steer PepsiCo toward healthier products, Nooyi has pledged to more than double sales from such items, which include Tropicana orange juice and Quaker oatmeal, to $30 billion by 2020. The move has attracted criticism from some who say it has distracted her from turning around the core soft drink business.

Last week, PepsiCo said it will sell its interest in 24 soft drink bottlers in China to Hong Kong-listed Tingyi Holdings Corp, a move that was seen as extending its distribution deeper into China but also surrendering some control.

© 2015 Thomson/Reuters. All rights reserved.

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