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NEW YORK PepsiCo Inc (PEP.N) reported first-quarter earnings that were slightly ahead of Wall Street expectations, helped by higher sales and prices of snacks and drinks, and warned that more price increases are on the horizon.
PepsiCo, whose shares rose to their highest level since 2008, said price increases taken earlier in the year to help offset soaring commodity costs were not as large as "we would have liked or expected."
The company said it expects to raise prices again sometime after July 4, during the peak summer selling season for soft drinks.
PepsiCo stood by its 2011 earnings growth target, which it said reflected higher commodity costs, difficult economic conditions in developed markets and investments in brand-building and emerging markets.
PepsiCo shares rose to $69.92 on Thursday, their highest since October 2008, before closing at $69.72, up $1.79.
Because PepsiCo's food business gives it a much broader exposure to volatile commodity costs, its shares traded around 15 times the forward SmartEstimate for earnings, according to Starmine data, a discount to arch-rival Coca-Cola Co (KO.N).
But Morningstar analyst Philip Gorham said he thinks the valuation gap could close later this year, if the maker of Frito-Lay snacks, Quaker oatmeal and Tropicana juice can continue the improved performance shown in its first quarter compared with the fourth quarter.
"Coke is probably on top at this point but ... Pepsi's obviously now a lot more focused on its execution in North America so I think we'll see the performance gap close this year," Gorham told Reuters. In a research note, he called PepsiCo "an undervalued stock in an industry that could provide a safe haven if investors turn defensive".
Coca-Cola shares closed up 41 cents to $67.41 on the New York Stock Exchange on Thursday.
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PepsiCo's net income fell to $1.14 billion, or 71 cents per share, in the first quarter, from $1.43 billion, or 89 cents per share, a year ago.
Excluding items, earnings were 74 cents per share, topping analysts' average estimate, according to Thomson Reuters I/B/E/S, by a penny.
Revenue rose 27 percent to $11.94 billion, topping analysts' average estimate of $11.71 billion. Excluding the impact of acquisitions, revenue was up 5 percent.
Worldwide, volume rose 3 percent in the snacks business and 3.5 percent in the beverage business, excluding the impact of acquisitions. North American beverage volume rose 2 percent.
Price increases and selling more higher-priced products provided a 2 percentage point lift to sales.
JP Morgan analyst John Faucher said PepsiCo raised prices less than expected because market leader Coca-Cola did not either, knowing that price increases often hurt sales volume.
"Coke is very focused on growing brand Coke volume in the U.S.," Faucher said. "That, combined with the synergies and all the benefits from the bottling deal, have basically gotten them to the point where they feel like they can get through the summer without taking more pricing (raising prices), so they can get the volume growth that they want to show."
Coca-Cola said on Tuesday that worldwide volume rose 6 percent, with a 2 percent gain in North America. It said its lift from pricing and mix of products was in the 1 to 2 percent range and hoped to raise that to a 3 to 4 percent range for the rest of the year.
Both Pepsi and Coca-Cola bought their North American bottlers last year to have more control over distribution and save money, which helps to offset higher commodity costs.
PepsiCo stood by its prior target for 2011 earnings to grow 7 percent to 8 percent from $4.13 per share in 2010. It expects commodity cost inflation of $1.4 billion to $1.6 billion this year, on a base of $18 billion of commodity-based input costs.
It also expects a 1 percent to 2 percent benefit from the weak U.S. dollar, which boosts the value of overseas sales.
(Additional reporting by Jessica Wohl in Chicago; Editing by Lisa Von Ahn, Derek Caney and Carol Bishopric)