(Photo Credit: rebecca anne)

Earnings season is underway and Pepsico (PEP) is set to report earnings for its third fiscal quarter of the year before the market opens on Thursday, October 9. Despite a tepid market for sugary carbonated beverages analysts on Estimize are expecting Pepsi’s earnings to rise by 6% while The Coca Cola Company’s earnings remain flat. 

Earlier this week the make-your-own soda at home company, SodaStream (SODA), may have shed some light on the state of the soda market when it pre-announced earnings for the quarter, warning investors of dismal sales. SodaStream guided that revenue would come in around $125 million, much below the Estimize consensus of $157 million. 

But a flailing soda industry isn’t necessarily the end of the world for Pepsico. According to estimates from Forbes, Pepsico’s carbonated beverages business only makes up about 17% of the company’s total value. Pepsico’s snack division, Frito-Lay North America, is by far the company’s most profitable segment. This quarter contributing analysts on Estimize are forecasting that Pepsico will have a strong quarter, likely fueled by an expansion of its snacks business.

The apparent shift in consumer preferences doesn’t seem to be constrained to just soda either. Shoppers are moving away from processed and high calorie foods into healthier and more natural options. If you need any proof just look at the meteoric rise of Whole Foods, or the stagnation of McDonald’s and fast food chains at the hands of new fast casual restaurants like Chipotle.

If the health focused foods trend begins to bleed over into snacks, that could cause problems for Pepsico. However, management doesn’t seem too concerned about overall profit in the short term. Just last quarter the company raised its earnings guidance for the current period, reaffirming a positive view.

Things mostly look good, but one area of concern for Pepsico is in its second largest market, Russia. Stifled economic conditions as a result of Russia’s geopolitical clash with Ukraine could cause Pepsi a headache. 7% of Pepsico’s sales have come from Russia this year, but tightened purse strings and the sinking value of the Russian ruble could both be problematic.

In case you haven’t heard the surging value of the US dollar is the leading contender to be the scapegoat this earnings season. Thankfully the poor weather excuse has come and gone, but the cost of repatriating international sales back into US dollars is the new front-runner excuse to be blamed for poor corporate results. The Russian ruble is a particularly worrisome currency, its value has dropped 14% against the US dollar over past quarter alone. Pepsi’s sprouting profits in Europe and Asia could also come under pressure as a result of the almighty dollar.

Although there is a headwind against soda and economic conditions in Pepsi’s emerging markets are less than ideal, the Estimize community is still expecting a big quarter from Pepsi. Contributing analysts expect Pepsi’s profits to increase by 6% compared to the same quarter of last year while earnings at arch rival, The Coca-Cola Company, are flat.

(Graph above from ChartIQ Visual Earnings)

Pepsi’s expected profit growth is impressive for a company in the food industry of its size, but something else has investors licking their chops. Activist investors including Trian Partners are getting involved with Pepsi, and they want to the see the company split into two. So far Pepsico’s management has downplayed the efforts of activists, but two blockbuster breakups are fresh on investors’ minds. eBay has finally decided to set PayPal free, and Hewlett-Packard will be separating its printers and computers division from its enterprise services.

Activist shareholders want to see Pepsico spin off its sickly soda business, allowing Frito-Lay to thrive. Theoretically this would leave behind a powerhouse snacks company while allowing a new management team to take a much cleaner focus on the soda business, and put it on the path toward a brighter future.