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    PepsiCo Earnings Rise as Overseas Sales Surge

    Analysts see potential pricing war with Coke on the horizon.

    PepsiCo Inc. said second-quarter earnings rose 13 percent, topping analysts' estimates, on surging demand for noncarbonated drinks in Europe and Asia and Quaker foods in the United States.

    According to Bloomberg News, net income at the world's No. 2 soft-drink maker climbed to $1.19 billion, or 70 cents per share, from $1.06 billion, or 61 cents, a year earlier. Sales in the three months ended June 11 increased 8.9 percent to $7.7 billion, Purchase, N.Y.-based PepsiCo said in a statement.

    International sales jumped 15 percent after the company expanded distribution of Gatorade sports drinks in markets including China and boosted promotions for the Mirinda soft-drink brand in Argentina. In the United States, where PepsiCo gets two-thirds of its revenue, it marketed Quaker oatmeal as healthy for consumers, helping lift sales more than 10 percent.

    “The overseas markets are growth drivers,'' said Walter Todd, who manages $1 billion for Greenwood, South Carolina-based Greenwood Capital Management, including 340,000 PepsiCo shares. “Pepsi has much less exposure internationally than Coke does. Clearly, Pepsi has an opportunity to grow that as a percentage of their income.''

    PepsiCo was expected to earn 67 cents, the average estimate of 14 analysts surveyed by Thomson Financial. The company said it will earn $2.60 to $2.63 a share this year, compared with its April forecast that profit would be at least $2.60.

    Coca-Cola Co.'s net income was expected to fall 2 percent to $1.55 billion, or 64 cents a share, the average estimate of 16 analysts surveyed by Thomson Financial. Atlanta-based Coca-Cola reports results July 21.

    Shares of PepsiCo, which also makes Mountain Dew soda and Tropicana orange juice, rose $1.15 to $55 in New York Stock Exchange composite trading. Before today, the shares had risen 1.5 percent in the past year, compared to a 16 percent drop for Coca-Cola.

    International beverage volume increased 10 percent, led by gains in the Middle East, China, Argentina and Venezuela, as noncarbonated drinks surged more than 10 percent. Snacks' sales measured by volume climbed 3 percent, with more than 10 percent increases in India, China, Russia and Turkey. U.K. sales declined because of a drop in the Walker's snacks business.

    “The international business continues to do quite well,'' Legg Mason Wood Walker analyst Mark Swartzberg in New York told Bloomberg. “We saw a pretty good balance between snacks and beverages, with stronger growth outside the U.S. with beverages than snacks.''

    North American beverage sales rose 4 percent because of more than 10 percent gains for Aquafina and Propel bottled waters, while sales of soft drinks declined. Frito-Lay snacks' revenue in North America jumped 6 percent because of higher sales of Lay's, Cheetos and Tostitos lines. Quaker foods soared 16 percent, led by oatmeal, Rice-A-Roni and Aunt Jemima syrup.

    “There were concerns going into the quarter about competitive activity from Coca-Cola as well as the impact of rising oil prices on Frito-Lay,'' Robert van Brugge, an analyst with Sanford C. Bernstein & Co. in New York, said in an interview with Bloomberg News. “It looks like they weathered the storm once again.''

    PepsiCo sales have risen an average of 7.5 percent the past five years, compared with 2.3 percent for Coca-Cola.

    Frito-Lay North American revenue rose following a move by Irene Rosenfeld, the division's chief since September, to boost advertising spending 50 percent for big brands including Tostitos, Doritos and Lay's

    Frito-Lay has taken small price increases, some indirectly by reducing package sizes, to maintain its margins as energy prices have risen, Morgan Stanley analyst Bill Pecoriello said in a report. Fuel represents about 4 percent of Frito-Lay costs.

    CEO Steve Reinemund said in April that he is preparing to boost marketing spending for beverages in North America this year in response to Coca-Cola's plan to raise spending by $400 million. New products include Pepsi Lime and Diet Pepsi Lime were introduced starting in April.

    “Pepsi has a much more attractive portfolio of beverages than Coke,'' said Washington-based Christopher Meeker, analyst with Farr Miller & Washington, which overseas $500 million including 200,000 shares of PepsiCo. “Pepsi has glaring competitive advantages.''

    Coca-Cola CEO E. Neville Isdell also increased discounts and coupons starting in May.

    “PepsiCo will probably need to respond to a Coca-Cola pricing war,'' James Russell, director of equity research for Cincinnati-based Fifth Third Asset Management, told Bloomberg News. “I hope it doesn't damage either franchise.''

    PepsiCo earnings have risen an average of 12 percent the past year as Reinemund expanded distribution globally and acquired international lines, including General Mills Inc.'s stake in a European joint venture selling snack food.

    Coca-Cola gets 83 percent of sales from soft drinks, whose volume has been gaining less than 1 percent a year in the United States for the past five years amid increased consumer concerns about obesity.

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