PepsiCo Tops Quarterly Profit Estimates After Cutting Costs

July 23 (Bloomberg) -- Bill Schmitz, analyst at Deutsche Bank Securities, talks with Erik Schatzker about second-quarter results from Pepsi as the company raised its annual forecast on a reduction in costs and looks at whether the strong quarter is enough to squash calls from activist investor Nelson Peltz to split up the company’s businesses. He speaks on “Market Makers.” Schmitz, his family and firm, do not own shares of PepsiCo, but PepsiCo is an investment banking client of Deutsch Bank Securities, which received non-investment banking compensation from PepsiCo in 2014.

PepsiCo Inc. (PEP) reported better-than-projected profit and raised its annual forecast after reducing costs, giving the company more leverage in a looming fight with activist investor Nelson Peltz.

Excluding some items, profit totaled $1.32 a share, the Purchase, New York-based company said today in a statement. That topped the $1.23 average estimate of 17 analysts, according to data compiled by Bloomberg. PepsiCo expects to increase earnings per share by 8 percent this year, excluding the effects of currency fluctuations, up from a previous target of 7 percent.

The results may help Chief Executive Officer Indra Nooyi ward off an attack from Peltz, the billionaire investor who has lobbied to break up the company’s snack and beverage businesses. PepsiCo’s management and board have spurned that idea, opting instead for a plan to improve performance and cut costs. The beverage company has now made enough progress that it’s ready to boost its forecast, Chief Financial Officer Hugh Johnston said.

“The business is performing well right now, and as we’ve gotten further into the year we’ve got confidence that we could take it up,” Johnston said in an interview. “As we look at the balance of the year, we feel we have a pretty clear pathway.”

Stock Climbs

Shares of PepsiCo, which is second only to Coca-Cola Co. (KO) in the global beverage market, rose 1.9 percent to $90.82 at the close in New York. The stock has climbed 9.5 percent this year, compared with a 7.5 percent rise for the Standard & Poor’s 500 Index.

Peltz’s firm, Trian Fund Management LP, might embark on a proxy contest for control of the board, he said during an investor event last week. Trian has spoken with about 100 top PepsiCo investors and some are coming around to his way of thinking, Peltz said at the time.

The California State Teachers’ Retirement System, a Sacramento-based public pension fund, sent a letter to PepsiCo on June 30 asking for a Trian appointment to its board, said Ricardo Duran, a spokesman for Calstrs. The retirement fund didn’t set a deadline for an answer to the less than two-page request and hasn’t received one, Duran said. The fund has a $300 million commitment to Trian as an activist manager, he said.

“Fundamentally, we agree with Trian’s approach to the company with regard to adding value,” Duran said. “He’s got a good track record in past situations such as these and especially with consumer-products companies.”

Long-Term Concerns

The teachers’ fund hasn’t taken a position on whether to split beverages from the world’s largest snack maker, Duran said. Contents of the letter, which Duran said the fund hasn’t released, were first reported by the Financial Times.

“Calstrs is a long-term shareholder and while we appreciate PepsiCo’s strong short-term performance, unfortunately the three- and five-year periods show the company’s stock price significantly underperforming when measured against the company’s self-selected peer group,” the fund said in a statement forwarded by Duran.

PepsiCo’s Johnston and Trian both declined to discuss the letter.

PepsiCo’s latest results were helped by cost cutting and better-than-expected performance in Europe, Johnston said. Organic revenue grew 5 percent in Europe, lifted by higher pricing and a 1 percent volume sales gain in both snacks and drinks.

Second-quarter net income totaled $1.98 billion, or $1.29 a share, compared with $2.01 billion, or $1.28, a year earlier. Revenue rose 0.5 percent to $16.9 billion, beating the $16.8 billion average of analysts’ estimates. Worldwide snacks volume increased 1 percent, as did global beverage volume. The company said it’s on track to deliver $1 billion in productivity savings this year.

The results outshined those of Coca-Cola, which reported quarterly revenue yesterday that missed analysts’ estimates. The Atlanta-based company is ramping up marketing spending to help reignite sales.

PepsiCo’s new forecast would raise annual earnings to about $4.72 a share from $4.37, though foreign currency effects are expected to reduce growth by about 4 percent, the company said.

To contact the reporter on this story: Duane D. Stanford in Atlanta at dstanford2@bloomberg.net

To contact the editors responsible for this story: Nick Turner at nturner7@bloomberg.net Ben Livesey

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