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Pepsi Shares Pop as a Key Investor Worry Fizzles

Friday, 2 Oct 2009 | 3:18 PM ET

PepsiCo shares rallied Friday as the beverage company inched closer to the dawn of a new Pepsi generation.

Pepsi
Photo: Mashroms
Pepsi

Pepsi filed proxies connected with its planned acquisitions of its two largest bottlers, Pepsi Bottling Group and PepsiAmericas .

The proxies, which did not include a provision for a "material adverse change," imply that Pepsi will likely go ahead with an acquisition even if regulators force Pepsi to terminate distribution relationships with Dr Pepper Snapple Group . According to analysts, this was a concern that was weighing on Pepsi shares in recent weeks.

In addition, there were positive comments from analysts. Barclays' consumer staples team moved Pepsi to the No. 1 spot on its "Favorites" list, and Deutsche Bank increased its estimate for Pepsi's 2010 earnings, citing lower projections for the cost of interest and depreciation for the new forecast. Deutsche Bank analyst Marc Greenberg now expects earnings to be $4.20 a share, about 4 cents higher than his prior estimate for next year's earnings.

Analysts polled by Thomson Reuters had estimated earnings of $4.10 a share.

In a research note, Stifel Nicolaus analyst Mark Swartzberg said he suspects the Wall Street consensus for PepsiCo is still too low, and he expects projected earnings growth will accelerate materially before the year's end.

His estimate currently stands a penny below Greenberg's at $4.19 a share.

Pepsi is expected to close its acquisition of the bottlers in either late 2009 or early 2010.

Although the proxies seem to indicate a strong commitment to get the deal done regardless of the relationship with Dr Pepper, it is still a significant relationship for PepsiCo, Swartzberg said.

Swartzberg expects Dr Pepper to try to use the situation to negotiate a better deal with Pepsi, but not remove all of its volume from the Pepsi system.

This could improve the economics for Dr Pepper, and as a result, Swartzberg raised its price target for Dr Pepper to $32.

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