From the Wall Street Journal

By Kelly Evans

Having lost its fizz, PepsiCo now needs to serve up a strategy investors can swallow.

The soft-drink and packaged-foods giant reports third-quarter results Wednesday. Analysts expect about an 11% year-on-year increase in revenue, bolstered by demand from emerging markets while U.S. sales trends remain lackluster. Earnings, meanwhile, are seen up 6.5% from the year-earlier period, to $1.30 a share.

That difference between revenue and earnings growth partly stems from higher commodity costs. And it is why Pepsi has been raising prices on soft drinks and snacks via its Frito-Lay business. Goldman Sachs notes Doritos prices are up more than 20% over the past two years, while Tostitos are up about 15% and Lay's nearly 9%.

Trouble is, Pepsi is doing that in a difficult consumer environment. In turn, its market share in U.S. salty snacks dropped to 53.6% in the third quarter, according to Goldman, compared with its 55.5% historical average.

Pepsi also is facing challenges in its core beverage business. This is partly because of the weak economic recovery, but also because of the share it has lost to Coca-Cola. Diet Coke replaced Pepsi as the second-best-selling soft drink in the U.S. last year, following regular Coke. The two companies' divergent share prices lately underscore their diverging fortunes: Pepsi is down more than 12% since July, while shares of Coca-Cola are roughly flat.

Now, with Coke planning to invest $20 billion to $30 billion into its business through 2015 and potentially raising its marketing budget by $1 billion a year, Pepsi faces an existential crisis. It isn't enough for Pepsi to lower earnings targets again, Credit Suisse analyst Carlos Laboy said in a recent client note.

Rather, Pepsi would do better to focus solely on its beverage unit, which has better long-term prospects. With that in mind, "a spinoff [of Frito-Lay] would be optimal," Mr. Laboy wrote. By Credit Suisse's calculation, such a move could potentially boost Pepsi shares to $85 from their current level of about $61.

For now, such speculation may help keep Pepsi shares from weakening further. But the company shouldn't mistake that as a sign of confidence in its current strategy. Investors will be listening Wednesday for signs Pepsi is seriously rethinking its future. If not, its shares could crumple.

Write to Kelly Evans at kelly.evans@wsj.com