Is Pepsi a Worthy Investment?

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

The truth about the soda industry is that it has been always dominated by two rivals: Coca-Cola (NYSE: KO) and Pepsi (NYSE: PEP). You can ask any child you find on the street what their favorite soda is and you are likely to get the name of either of these two brands as the answer.  This, however, is not to say that there aren’t any other soft drink manufacturers that have risen to the occasion and posed a challenge to these multi-billion dollar corporations.

There is one question that lingers on the minds of many investors, and this article aims at shedding some light on it. Despite the fact that Pepsi enjoys a large market share of the soft drink industry, is it a worthy investment? From Pepsi’s third quarter earnings report, it was shown that there was a 4.9% decline in revenue, which was attributed to a number of factors.  Two of the reasons were increased spending on advertising and high production costs.

This ultimately means that Pepsi has taken a considerable blow in its fight to overtake Coca-Cola as the leading soft drink maker in the world. However, its market share was strengthened, as organic sales in Asia, the Middle East, and Africa rose substantially. As such, many analysts retain a bullish outlook on Pepsi, which has further been supported by the rise in its share price, slight though it may be.

The Competition Pepsi Faces

It seems that the road to establishing a stronghold in the soft drink market will not be so easy for Pepsi. Apart from Coca-Cola, which has proved to be Pepsi’s largest rival, other soft drink makers are coming out strongly. Sodastream (NASDAQ: SODA), which is quite young in the soft drink industry, has been causing a huge stir among investors. Sodastream is the company behind the ingenious invention that allows you to make your favorite carbonated drink in the comfort of your home at less than half the price of cans.

Why is Sodastream such a threat to Pepsi? The answer is simple. Analysts have been keen to point out that Sodastream does not have any debt and has the right kind of relationship with the supply chains, which when coupled with the rising demand for the fizzy drink sets, helped net income jump by 66%. Another competitor that should not be overlooked is Mondelez (NASDAQ: MDLZ), which was recently created after the Kraft Foods split in October.

Mondelez is responsible for brands such as Ritz and Oreo, and although third quarter earnings were not that great, with net income falling from about $922 million to $652 million, the CEO Irene Rosenfeld remains positive about its future. She iterated that she was confident about the position of the stock, as 44% of its revenue was from developing markets such as Russia and Brazil.

Dr Pepper Snapple Group (NYSE: DPS) also proves to be a worthwhile competitor to Pepsi since it comes in third on the list of top non-alcoholic beverage makers in terms of sales. In a bid to put up more of a challenge to the already well-established Pepsi and Coca-Cola, many keen investors had predicted the way forward for Dr Pepper Snapple would be to join forces with a home-based beverage maker. Although this is yet to happen, Dr Pepper on Tuesday announced that it will be teaming up with Green Mountain Coffee Roasters to produce new portion packs.

The Snapple-branded beverages will be available in stores in K-cup and Vue packs as early as next year. Hopefully this will give more effective competition to the veteran companies, since the drinks are projected to retail at much lower prices. The strongest competition that Pepsi faces is undoubtedly from Coca-Cola, which in the past enjoyed a monopoly in the soft drink industry. Recent reports indicate that Coca-Cola plans to make a $300 million investment over the next three years in Vietnam, which is sure to boost its market share in the region.

With $2 billion already invested in India and more on the way, Coca-Cola has been witnessing high growth in the country, further strengthening its position as a soft drink market leader.

The Verdict On Pepsi

After all is said and done, it is evident from the chart above that Pepsi is a stock worthy of your investment. This can be attributed to the fact that it has shown signs of consistent growth over the past two years, which is what every investor wishes from their investment. Although it has hit a couple of snags along the way, it is still well on its way to ousting Coca-Cola from its comfort position in the next few years to come.


muhammadbazil has no positions in the stocks mentioned above. The Motley Fool owns shares of PepsiCo and SodaStream. Motley Fool newsletter services recommend The Coca-Cola Company, PepsiCo, and SodaStream. 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.If you have questions about this post or the Fool’s blog network, click here for information.

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