Pepsi: More Than Just Soda

Dan is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

If you want to invest in stocks and you'd like to sleep at night, then you need to own a stock that’s resilient without sacrificing growth. Pepsi (NYSE: PEP) fits the bill.  We’ll take a look at why Pepsi is so well positioned and why it’s likely a better investment than Coca-Cola (NYSE: KO).

Snack domination

Some people think of soda when they hear the word Pepsi, but that shouldn’t be the case. When you think of Pepsi, you should think of domination in the snack category. Pepsi owns many popular brands, including Fritos, Doritos, Cheetos, and Lay’s.

The above list doesn’t have much association with the now health-conscious consumer, but sales for these brands have remained strong. And Pepsi’s snack sales are likely to get stronger.

What some might not realize is that investing should be more about investing in management than anything else. For instance, Pepsi management always wants to stay ahead of industry trends. That’s why it offers “healthier” versions of its carbonated beverages, and it’s also why Pepsi always has products in its pipeline.

In regards to beverages, Pepsi is producing natural sweeteners and flavorings, which leads to reduced calories. As far as innovation is concerned, examples include Quaker Real Medleys, Stacy’s Gingerbread, Stacy’s Cocoa, Lay’s Stack Potato Chips, and Ruffles Crispy Fries Potato Strips. And let’s not forget about Pepsi’s deal with Theo Muller for yogurt production. Yogurt is one of the healthiest snacks on the market, and demand for yogurt has skyrocketed.

Pepsi will always figure out what the consumer is most interested in and then move in that direction. Therefore, you don’t have to worry about a decline in soda sales (or any other area) throughout the industry; Pepsi is smart enough to build in areas that are performing well.

Pepsi’s other half

Pepsi and Coca-Cola have been trading in tandem for years. The chart below is a good example:

PEP data by YCharts

If you’re thinking a dividend yield might be the determining factor, don’t bother. They both yield around 3%. Both companies also offer similar value, as they both trade around 22 times earnings.

Coca-Cola is also attempting to cater to the health-conscious consumer. It’s offering lower-calorie and no-calorie versions of its soft drinks. And it’s focusing more on its Minute Maid, Simply, and PowerAde brands.

Coca-Cola’s second-quarter results underwhelmed, mostly due to slower growth in Europe, China, and Latin America. However, Coca-Cola still grew earnings 4% year-over-year, and its ready-to-drink tea and packaged water performed well.

Coca-Cola still has big potential in emerging markets with carbonated beverages, where the consumer is less health-conscious, and it doesn’t hurt that Coke is one of the most well-known brands in the world. Furthermore, Coca-Cola is making strides with its healthier offerings. That said, Pepsi’s exposure to the snack market gives it an advantage.

Nelson Peltz

Nelson Peltz of Trian Fund Management is trying to talk Pepsi into purchasing Mondelez International (NASDAQ: MDLZ). In Peltz’s opinion, this acquisition would lead to Pepsi becoming even stronger in the snack category. This might be true, but Mondelez hasn’t been that impressive since spinning off from Kraft, and its exposure to Western Europe is seen by some as a negative. Plus, it’s not likely Pepsi would want to market brands like Oreo, Chips Ahoy!, and Cheese Nips when it’s trying to focus more on a health-conscious consumer.

Nelson Peltz does have a history of getting his way, so there might be some potential here. Just don't get your hopes up if you're a Mondelez International shareholder.

Conclusion

Many investors don’t want to get involved with Pepsi because they’re thinking about declining demand for soda, but this could be a mistake. It’s not about the current product(s), but the management.

Pepsi management will always push out products that cater to consumer demands. That being the case, Pepsi looks to be a very solid long-term investment. And if the broader market suffers a steep correction, you can simply buy more at cheaper prices.

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Dan Moskowitz has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of PepsiCo. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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