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Stock Analyst Update

Pepsi Going Strong as Cola Wars Heat Up

A solid quarter primes the soft-drink giant to do battle with Coke.

PepsiCo (PEP) on Wednesday announced strong results for both the fourth quarter and 1999 as a whole, solidifying its snack-food dominance and positioning it well in its continuing battle with beleaguered rival Coca-Cola (KO).

PepsiCo reported pro forma quarterly earnings per share of $0.33, up 28% from a year earlier and $0.02 better than the consensus estimate. Revenue rose 6% for the quarter and the year on a pro forma basis. (Pro forma numbers take out the effects of Pepsi's spin-off of its bottling operations and its acquisition of Tropicana, thus making year-to-year comparisons more relevant.) Gains came in all three of the company's divisions--Frito Lay, Pepsi Cola, and Tropicana--with beverage profits particularly strong.

Pepsi's solid quarter is in sharp contrast with Coke, which recently laid off 20% of its workforce and announced massive write-offs which resulted in its first quarterly loss in more than a decade. Coke suffered from declining revenues in 1998 and the first half of 1999 as a result of weak overseas economies and a contamination scare in Europe. While Pepsi officials denied in a conference call Wednesday that they're making any moves with their rival in mind, CEO Roger Enrico did take a dig at the write-offs Coke was recently forced to take on some of its bottling assets, saying, "Our bottlers have done a far better job of allocating capital than our competitors have."

Given the disarray Coke is in as it tries to adapt to new management and major restructuring, now would seem to be the time for Pepsi to muscle in and try to grab some market share. That won't be easy, though, because Coke is a tough competitor, even in its weakened state. But with its own restructuring now complete, Pepsi is leaner and healthier than it's been in years.

 

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