Beyond Pepsi Earnings... Downgrade Warning By Moody's (PEP)

PepsiCo, Inc. (NYSE: PEP) had decent earnings but came in with layoffs today.  Shares shares have not reacted well with a drop of 3.7% to $64.28, but now there is something else for investors to worry about.  Moody’s Investors Service has cut its outlook to Negative (down from Stable) on a lower guidance and on its restructuring plans.

Moody’s did affirm the beverage and snacks giant’s unsecured long-term rating at “Aa3” in the call.  Moody’s noted specifically that it has concerns about the possible impact that the earnings and restructuring will pose against the firm’s credit ratings in a changing 2012.  A concern is also that pricing power may not offset commodity input prices.

Higher pension and finance costs were also cited. Moody’s does expect Pepsi to be successful in close to $1.5 billion in cost out to 2015, but the largest cash costs are expected to come this year.  Pepsi’s plans on a higher dividend and a share buyback are also expected to eat into the liquidity measures.

Moody’s specifically noted that most of Pepsi’s financial metrics more closely represent a lower credit rating category.  It sounds like a credit downgrade is all but assured at this point.

Moody’s also signaled that Pepsi would have to show momentum across all operating segments and show that the cost savings initiatives were boosted and that operating leverage would have to be at or below the current metrics to stabilize that rating.

Unless Indra Nooyi does a 180-degree reversal here, it sure sounds like a downgrade is coming to PepsiCo.