Schaeffer's Market Observation Features PepsiCo.

Business Editors

CINCINNATI--(BUSINESS WIRE)--Feb. 4, 2004

Today's Market Observation features PepsiCo (NYSE:PEP). Schaeffer's Market Observations are market-based reports that provide insight and analysis from a unique and unbiased perspective. Market Observations are published on www.SchaeffersResearch.com -- the home of Bernie Schaeffer and Schaeffer's Investment Research. To receive a free email notification each time a new commentary is written about one of the featured stocks or any of your favorite stocks, click on the following link.

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PepsiCo (NYSE:PEP) is a global snack and beverage company. The company manufactures, markets and sells a variety of salty, convenient, sweet, and grain-based snacks, carbonated and non-carbonated beverages, and foods. PEP is organized in six divisions: Frito-Lay North America, Frito-Lay International, Pepsi-Cola North America, Gatorade/Tropicana North America, PepsiCo Beverages International, and Quaker Foods North America. The company's North American divisions operate in the United States and Canada. Its international divisions operate in more than 175 countries, with PEP's largest operations in Mexico and the United Kingdom.

With all that said, the firm is preparing to release its fourth-quarter earnings report tomorrow before the market open. Currently, the Street is looking for a bottom line figure of 52 cents per share (with ranges between 50 and 58 cents). Revenue is expected to come in at $7.83 billion (its ranges run from $7.74 to $7.94 billion). With operations in more than 175 countries, the demise of the U.S. dollar will no doubt bolster the company's bottom line. (These currency impacts on multi-national corporations will have to be considered going forward, as investors question Corporate America's ability to grow earnings without the aid of the deteriorating local currency should the dollar rebound going forward.)

Technically speaking, the earnings release is occurring as the shares move back toward the top of their recent range. In fact, the daily chart shows the equity being rebuffed from the 48.87-48.88 area twice in recent memory (first on October 7 following its third-quarter earnings report and more recently on December 1). The December peak did indeed qualify as a "double-top" reversal pattern and portended a 5.8-percent decline in the stock.

Click the following link to see the Daily Chart of PEP since September 2003 with 10-Day Moving Average:

http://www.schaeffersresearch.com/wire?ID=9398 .

Heading into earnings report, the equity has moved higher and has advanced to the area of peak front-month open interest at the February 47.50 call. With 6,319 open contracts, this option dwarfs all other strikes. The Schaeffer's put/call open interest ratio (SOIR) has trended lower since peaking at 0.85 on December 31. Currently standing at 0.50, the SOIR possesses a reasonably complacent 22nd percentile ranking when meshed with all readings taken over the past year. It looks as if some of that pessimism may have had the opportunity to unwind ahead of the earnings report. In fact, I would not have a problem putting PEP in as a candidate for a "sell on the news" issue.

The two charts below compare the current front-month open interest configuration with that of the last earnings period. Note that investors have put most of their eggs in the 47.5 call basket this time around. For the October release, there was a better balance of out-of-the money put contracts and in- to at-the money call positions. Our data indicates that the company offered up a two-percent upside earnings surprise last time and received just an immediate 0.84-percent pop in share price.

Click the following link to see the February and October Open Interest Configurations for PEP:

http://www.schaeffersresearch.com/wire?ID=9398 .

Adding to that assumption is the recent change in short interest. Over the most recent reporting period, the 25-percent rise in the number of shares short looks great on the surface, until you dig a little deeper. At 12.2 million shares short, short interest still hovers near historically low levels for the stock. The 2.62 days to cover is also on the anemic side and stands about in the middle of the recent range for such data. In fact, the 12.2 million shares shorted represents just 0.71 percent of the float on PEP shares. In other words, short sellers represent the minority of traders here.

Looking at analysts opinions, the shares demonstrate greater room for downward revisions than upside guidance. Currently, 14 of the 20 analysts covering the company rate it a "buy" or better. There are currently six "hold" ratings and no "sell" opinions.

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About Schaeffer's Investment Research (www.SchaeffersResearch.com)

Schaeffer's Investment Research, founded by Bernie Schaeffer in 1981, is a financial information and trading resources company. It publishes Bernie Schaeffer's Option Advisor, the nation's leading options subscription newsletter. The firm's contrarian approach focuses on stocks with technical and fundamental trends that run counter to investor expectations. The firm's website, http://www.SchaeffersResearch.com , is recognized as one of the leading information sources for stock and options traders and was cited as the top options website by both Forbes and Barron's. Click here for more details about Schaeffer's trading methodology:

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