Is There Any Fizzle Left in Pepsi?

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

A SWOT analysis is a look at a company’s strengths, weaknesses, opportunities, and threats, and is a great way to gain a detailed and thorough perspective on a company and its future. Fresh off a decent third quarter earnings report, I would like to examine one of the largest food and beverage companies in the world: PepsiCo (NYSE: PEP).

Advantages:

  • Global Diversification: Pepsi’s products can be found in nearly 200 countries around the world, and their diverse product portfolio includes 22 brands that generate more than $1 billion each in annual retail sales; Pepsi’s brand portfolio includes Gatorade, Quaker, Tropicana, Frito-Lay, and Pepsi
  • Dividend: Currently, Pepsi pays out quarterly dividends of $0.54, which when annualized puts the dividend yield at 3.15%, which is well north of any rate that can be found in a CD or treasury bond
  • Institutional Vote of Confidence: 70% of shares outstanding are held by institutional investors, displaying the confidence big-money and long-term investors have in the company and its future
  • Accelerated Revenue Growth: in 2009, Pepsi reported revenue of $43.2 billion; in 2011, the company reported revenue of $65.3 billion; representing year over year annual growth of 22.95%, however revenue growth is highly anticipated too level out in the coming years, with projections putting 2014 revenue at $71.4 billion
  • Excellent Margins: the company currently possesses a net profit margin of 9.69%, giving the company a large cushion to fall on if its input costs were to rise

Weaknesses:

  • Established Nature: Pepsi already sells products in over 200 countries, not leaving much room for further expansion into new markets
  • Unhealthy Characteristic: Pepsi’s products, most specifically its Frito-Lay and Pepsi soda brands, are not considered healthy for the consumer, and as the world’s waistline continues to grow people will eventually turn to healthier alternatives
  • Exposure to European and American Markets: Out of the total $66.5 billion in revenue for 2011, $51.9 billion, or 78.12%, of that revenue was derived from American or European markets, and Pepsi’s huge exposure to these stagnant markets could prove to be detrimental to Pepsi’s growth rate
  • Debt: Currently, Pepsi possesses around $22.4 billion of debt on their balance sheets, and until the company gets this situation under control, this debt will weigh heavily on Pepsi’s core business

Opportunities:

  • Emerging Market Growth: From 2010 two 2011, Pepsi experienced 10% year-over-year volume growth in its Asia-Pacific Middle East Africa region, while over the same time period Pepsi experienced  3.5% volume growth in their Latin American region, and these two regions were Pepsi’s fastest-growing in terms of volume growth; this means that further growth in these emerging markets will be crucial for the overall success of the business
  • Acquisitions: In 1998, Pepsi paid $3.3 billion to acquire Tropicana, and since then Tropicana has more than paid back its initial investment to Pepsi, producing nearly $6 billion in worldwide retail sales just in 2011, and further acquisitions are undeniably a possibility
  • Energy Drink Market: The energy drink segment of the beverage market has been labeled as one of the fastest growing sub-industries in the world, and as Pepsi owns AMP Energy, Pepsi has a major player in an industry that is growing at a highly accelerated pace (Global energy drink consumption surged 14% in 2011 to 4.8 billion liters, up from only 3.3 billion liters in 2007)  
  • Product Innovation: Pepsi has a proven track record of developing new innovative brands and products, most recently a new line of Gatorade products, and further innovation should fuel growth into the future
  • Dividend Growth: Since implementing their dividend program, Pepsi has consistently boosted its quarterly payouts, from $0.04 in 1990, to $0.54 today, and further dividend growth is highly anticipated, with projections putting 2014 quarterly dividend payouts at $0.62

Threats:

  • Competition: The food and beverage industry is highly competitive, with some of the most prominent and important companies in the world operating in it, and competition to offer the best product for the lowest price can lead to margin contraction
  • Government Regulation: Recently some select states have imposed drastic taxes on the sale of soft drinks, while some have even banned the sale of drinks larger than a certain size, and further government regulation could strike crucial blows to Pepsi’s business
  • Rising Input Costs: The historic drought of this year has already had a significant effect on food prices, however if input costs were to rise further, Pepsi would be faced with the decision of swallowing the pain in their margins, or passing the costs onto their consumer
  • Gas Prices: Pepsi possesses a complex and affective distribution system to get their products to their customers, and if fuel prices were to rise, the price of getting these products to the consumer would rise, hurting margins

Competitors:

Major publicly traded competitors of Pepsi include Coca-Cola (NYSE: KO) and Dr. Pepper Snapple Group (NYSE: DPS). Coca-Cola markets more than 500 beverage brands, and directly competes with Pepsi into all of their core beverage markets. Coca-Cola pays out a dividend yielding nearly 3%, and is valued at around $164 billion. Dr. Pepper Snapple Group also is a diversified beverage company; however, it is only valued at around $9 billion. Snapple pays out a dividend yielding north of 3%, and offers faster paced growth than the other two beverage giants.

The Foolish Bottom Line:

Pepsi possesses several strengths, weaknesses, opportunities, and threats; however, in the end it appears to be a financially stable company that is a staple in the global food and beverage industry. The company pays out a decently sized dividend, and offers moderate growth. Pepsi is a tremendous long-term investment, but may face some short-term volatility. 


makinmoney2424 has no positions in the stocks mentioned above. The Motley Fool owns shares of PepsiCo. Motley Fool newsletter services recommend The Coca-Cola Company and 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!

blog comments powered by Disqus