A Global Food & Beverage Giant That Is Still Fizzling After Nearly 50 Years in Business

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 tremendous way to gain a detailed and thorough perspective on a company and its future. As 2013 begins, I would like to focus on global food and beverage company nearing the half century mark: PepsiCo Incorporated (NYSE: PEP).

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The Business:

Warren Buffett once said, “Never invest in a business you can’t understand.” This not only allows the investor to purchase a company with conviction, however also allows them to spot trends blind to unfamiliar eyes. With this in mind, investors in any company should fully understand the business model of the company. Pepsi is a global food and beverage company divided into the business segments of: Americas Foods, Americas Beverages, Europe, and Asia, Middle East, & Africa. Based on market capitalization, Pepsi is valued at $113.76 billion. Despite the industry’s competitive nature, the company’s pricing power results in Pepsi possessing a profit margin of 8.32%.

Strengths:

  • Steady Revenue Growth: In 2002, Pepsi reported revenue of $25.11 billion; in 2011, the company announced revenue of $66.50 billion, representing year over year annual growth of 11.43%, a trend that is anticipated to continue into the future, with projections placing 2017 revenue at $83.93 billion.  This growth has been a result of growth across all regions and major acquisitions
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  • Dividend: Currently, the company pays out quarterly dividends of $0.54, which annualized puts the dividend yield at 2.86%, a major upside for long-term investors
  • Institutional Vote of Confidence: 65.42% of shares outstanding are held by institutional investors, displaying the confidence some of largest investors in the world have in the company and its future
  • Relatively Low Volatility: Presently, the company possesses a beta ratio of 0.46, representing a company trading with significantly less volatility than the overall market, a major advantage for long-term investors 
  • Strong Product Portfolio: The company possesses an incredibly diverse and strong product portfolio, including the brands Pepsi-Cola, Lay’s, Mountain Dew, Gatorade, Tropicana, Diet Pepsi, 7-Up, Doritos, Quaker, Cheetos, Mirinda, Lipton, Ruffles, Tostitos, Aquafina, Pepsi Max, Brisk, Sierra Mist, Fritos, Diet Mountain Dew, Starbucks ready to drink beverages, and Walkers; all of which produce sale figures in the billions, and with this strong product portfolio comes a greater level of diversification and predictability for investors
  • Established Distribution Network: Pepsi possesses a vast distribution network stretching throughout the world, with nearly 300,000 employees, allowing the company to distribute a product rapidly and efficiently to quickly create revenue
  • Strong Free Cash Flow: In 2011, Pepsi generated $9.19 billion of cash flow, displaying the financial strength and security of the company

Weaknesses:

  • Net Debt: The company currently possesses a net debt of $23 billion, or $14.73 per share, a major weakness for investors
  • Margin Contraction: Pepsi’s profit margin has contracted from 15% in 2009 to currently only 8.32%, and this trend of margin contraction is a major downside for investors
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  • Premium Valuation: Presently, the company possesses a price to earnings ratio of 19.23, a price to book ratio of 5.07, and a price to sales ratio of 1.74, all of which indicate a company trading with a premium valuation
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Opportunities:

  • Dividend Growth: Since implementing their dividend program in 1952, Pepsi has consistently raised their dividend payouts and is anticipated to continue this trend well into the future
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  • Latin American Foods Segment: The company’s Latin America Foods segment has grown from generating $5.70 billion in revenue in 2009 to $7.15 billion in 2011, representing year over year annual growth of 12.00%; the continuation of this trend through products more adaptable to the Latin market will fuel overall company growth
  • Growth Through Acquisitions: In 1998, Pepsi acquired Tropicana for $3.3 billion; in 2011, the Tropicana brand generated over $5 billion in sales, and further acquisitions could present the opportunity for the company to fuel growth
  • Asia, Middle East, & Africa Segment: Over the past years, this region has been the company’s fastest growing in terms of organic growth, from generating $5.27 billion in revenue in 2009 to $7.39 billion in 2011, and further growth from this segment will fuel overall company growth
  • Innovative Product Offerings: Recently, Pepsi announced that the company would be rolling out a new Mountain Dew product line, hopefully replacing traditional morning drinks, and further product innovations could spark customer interest and fuel sales

Threats:

  • Rising Ingredient Prices: The historic drought of the past year has resulted in many ingredient prices rising drastically, and further increases in the price of ingredients could squeeze margins

Competitors:

Major publicly traded competitors of Pepsi include The Coca-Cola Company (NYSE: KO), Dr Peeper Snapple Group Incorporated (NYSE: DPS), Monster Beverage Corporation (NASDAQ: MNST), and Coca-Cola Enterprises Incorporated (NYSE: CCE). All of these companies operate in the beverage industry and compete directly with Pepsi. Coca-Cola is valued at $168.17 billion, pays out a dividend yielding 2.71%, and carries a price to earnings ratio of 19.13. Dr Pepper is valued at $8.94 billion, pays out a dividend yielding 3.54%, and carries a price to earnings ratio of 14.48. Monster is valued at $8.50 billion, does not pay out a dividend, and carries a price to earnings ratio of 27.29. Coca-Cola Enterprises is valued at $10.16 billion, pays out a dividend yielding 2.20%, and carries a price to earnings ratio of 16.16.

The Foolish Bottom Line:

Financially, Pepsi is relatively solid. The company possesses a proven track record of consistent revenue growth, a growing dividend, and a diversified and solid product portfolio. The only true weaknesses of the company are its debt load and premium valuation. Looking forward, the company will draw growth from Latin America and Asia, Middle East, & Africa. All in all, Pepsi is an incredibly stable and predictable investment that will hand investors consistent returns for decades to come. 


makinmoney2424 owns shares of Coca-Cola. The Motley Fool recommends Coca-Cola, Monster Beverage, and PepsiCo. The Motley Fool owns shares of Monster Beverage 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!

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