Pepsi: A Strong 'Buy' for the Long-Term
Helen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The growing concern among health organizations about the risks of regularly consuming soda has not deterred the American consumer in the past year from drinking sugary beverages at near record numbers. The National Health Center for Health Statistics recently released a report stating that half of the United States population over two years of age consumes sugary drinks on a daily basis. This trend caused many health experts to point their finger at soda as being a significant contributor to the growing obesity epidemic. In response to these claims the soda industry has stated that daily consumption of soda only accounts for 6.7%-8.2% of the overall caloric intake in children and only 5-8% of the caloric intake in adults.
The growing health concerns associated with soda consumption has put companies such as Pepsi (NYSE: PEP) in a difficult position. This position forces it to weigh the value of their soda product while looking to increase its market brand in other areas that are less prone to controversy, a factor that could inevitably result in a reduction in consumer demand. It is my opinion that Pepsi, according to recent news, is making the right decisions in modifying its brand to appeal to a larger base of consumers. The positive growth in its established beverage and snack products along with its marketing of new products that have long term growth potential will allow Pepsi to continue to issue substantial dividend payouts in 2012.
Fueled by the reported 2011 overall revenue of $66.5 Billion, an increase of 15%, which included a 5% increase in global beverage volume and an 8% increase in global snacks volume, it appears that Pepsi has fully rebounded from its 52 week low of $60 per share in September, 2011.
As a result of the positive growth and desire to further grow the Pepsi product, former Product CEO of the Food Division, John Compton has been promoted to President of the company and ex-CEO of Sam’s Club, Brian Cornell has moved into Compton’s former position.
As the near $4 per gallon gas prices has placed a significant emphasis on Pepsi’s ability to cut costs, the hiring of Cornell has come at exactly the right time for Pepsi. Cornell brings with him expansive knowledge of cost cutting measures in the consumer goods industry, a product of his work experience with Wal-Mart.
Despite competitors such as Soda Stream (NASDAQ: SODA) a company that manufacturers home soda machines, which reported a full year revenue increase of 39%, Pepsi is in no danger of being overtaken by the upstart company anytime soon. Pepsi’s growing dominance in the snack industry and its positive growth in beverage sales will allow it to continue to improve its position globally and sustain any minor reduction in sales that may result from consumer’s purchase of Soda Stream products.
This diversification strategy has allowed Pepsi to endure the heavily competitive soda market and, in my opinion, will allow its brand to continue to appeal to a global wide food and beverage consumer base that was reported in 2008 to hold a global value of $5.7 Trillion.
One of the most encouraging reports recently is the massive growth in Pepsi’s snack industry. Potato Chips have seen especially large gains as it has recently been reported that Pepsi’s “Banner Sun” brand that carries the names of Lay’s, Walker’s, Smith’s and Sabrita’s recently surpassed $10 Billion in global sales. Of these sales, approximately 60% of the Banner Sun products were sold outside North America.
This is a positive indication that Pepsi continues to expand its reach into countries such as China who, according to the USDA, had seen a 49% rise in sugar consumption from 1999 to 2009.
This increase in sugar consumption has lead to drastic increases in soda consumption. It was reported for the first 6 months of 2011 that Chinese sales of soda had topped 1 Billion unit cases, doubling the sales numbers from 2005.
As a result of the staggering increase in Chinese soda consumption, rival Coca-Cola (NYSE: KO) announced that it will be investing $4 Billion over the next three years in cooperation with its Chinese beverage partners. This investment will primarily focus on the increase in soda production, which will include substantial increases in the production of Sprite, the most popular soda in China.
Pepsi also has significant expansion plans in China as it recently announced its intent to invest $2.5 Billion over the next three years that will allow it to build 10-12 beverage and snack manufacturing plants.
By hedging its bets on the continued increase in soda consumption in China by further expanding both its globally known snack products and beverages, Pepsi is limiting its exposure to the further consumer backlash that is a result of the continued medical reports being released on the negative effects of soda on consumer's health. These concerns have recently been evidenced in the report that has tied soda consumption to an increased risk of pancreatic cancer and another report that claims that regular soda consumption can increase the tendency of a child to commit an act of violence.
Pepsi has reached even further in its efforts to offer a wide range of products to its consumers by its announcement of a partnership with Germany’s dairy giant Theo Muller Group. This partnership will allow the two companies to produce a high quality yogurt that will give it a substantial position in the booming United States yogurt market that has reportedly doubled in the past 10 years.
Pepsi continues to be a great long term investment as it continues to improve its image by expanding its product base. The old image of Pepsi as being solely a soda manufacturer is long gone. As a result, it is my opinion that Pepsi is currently selling at a discount to its fair market value and that it contains high potential for short and long term dividend payouts in the next few years.
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