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PepsiCo (PEP) Earnings Expected to Pop

When your biggest competitor is one of the top brands in the world, it can be easy to grow an inferiority complex. But in the age-old debate of Coke vs. Pepsi, PepsiCo (PEP) has taken the challenge head-on.

In fact, over the last 10 years, PEP’s earnings per share have soared 150% compared to Coca-Cola’s (KO) 65%, signaling fantastic business growth. 2009 has been no different, and that is expected to be reflected when Pepsi reports earnings on Thursday.

PEP has managed to top expectations for two consecutive quarters by an average margin of 3 cents per share. Third-quarter earnings are estimated around $1.03, compared to $1.06 from the same quarter a year ago.

Shares got a boost last week after Deutsche Bank raised its 2010 profit estimate by 4 cents, based on lower projections for the cost of interest and for depreciation.

But there’s more to PEP than meets the eye. Under the Pepsico umbrella are some of the most recognizable brand names, including Frito-Lay, Gatorade, Tropicana and Quaker. This diversification has kept the company fresh, especially this year when it has made great strides to change with the times. The blue-and-red logo got a makeover, and Gatorade went with the more modern ‘G’. In response to a more health-conscious society, Pepsi Throwback was introduced with sugar instead of corn syrup, and the company went green with spring water and cane sugar in Pepsi Natural.

PEP is also well aware of the importance of capturing consumer interest outside of just the product. This summer it ran a bottle cap promotion that gave the buyer a free song download for the popular video game Rock Band – a $2 prize for a $1.59 purchase. Coke ran a similar “under the bottle cap” promotion this summer. While Coca-Cola saw its promotion response tailor off, Pepsi held a steady 2.2 million participants throughout the duration of the web site promotion.

PepsiCo has not been immune to the economic slump though, and has made changes accordingly. Costs were cut via workforce reductions and factory closings.

Recently, PEP took another big step. After months of negotiations, PepsiCo reached agreements in August to acquire its two largest bottlers – Pepsi Bottling Group, Inc. (PBG) and PepsiAmericas, Inc. (PAS) – for $7.8 billion. This move could potentially eliminate an estimated $500 million to $1 billion in redundant costs. Shareholders could see this reflected in an increase in net income up to 20%. While the deal has lagged a bit and affected PEP’s share price, it is expected to close in late 2009 or early 2010.

The company also amped-up its international exposure. In August, PepsiCo acquired Amacoco, Brazil’s largest distributor of coconut water; last year, it acquired Russia juice-maker Lebedyansky, along with PBG. As an added bonus, Pepsi has even captured the cola crown in China. This expansion is mainly why analysts expect long-term future earnings growth of 10%-12% per year.

Look for PepsiCo to report strong earnings on Thursday.

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