Pepsi: An Undervalued Stock to Consider Now
Helen is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
I have always been a consumer of Pepsico (NYSE: PEP) products. Whether I was drinking Pepsi, Gatorade, or having a bag of Fritos, it has always sold some of my favorite products. As a stock, it is one of my favorite in the food and beverage industry. The stock has had a bumpy ride over the last 12 months, slightly down from this time last year. The stock is currently trading in the mid $60’s per share, roughly in between both the 52 week high and low. The company does have a low beta of 0.31, making it less volatile than the market. As for a dividend, Pepsi currently has a yield of 3.10%, or $2.06 annually. The company does have nice earnings per share of $4.03, giving the stock a price to earnings ratio of 16.50. This ratio is actually slightly lower than the industry, giving the stock the appearance of being undervalued. However, with such competitors as Coca-Cola (NYSE: KO), Dr. Pepper Snapple Group (NYSE: DPS), and Kraft Foods (NASDAQ: KRFT), Pepsi has a lot of strong competitors.
Coke is probably Pepsi’s biggest rival. Just as people have a preference between The Beatles and Rolling Stones, they will also have a preference of Pepsi or Coke. Unlike Pepsi with its relatively flat stock price over the last year, Coke has seen an increase of about 15%. So why do some investors like Coke so much? One reason is the stock is considered a dividend aristocrat, meaning it has increased its dividend annually over at least the past 25 years. Another reason investors like the stock is the company’s consistent ability to deliver. The company recently released first quarter results and revenue is at $11.1 billion, up from the same quarter the previous year. Part of the company’s current success is due to growth in emerging markets. The company achieved 20% growth in India, 24% in Thailand, and 10% in South Africa. If the company is able to continue this success, and I believe it can, then the profit and stock price will continue to rise.
For those who do not like Pepsi or Coke, Dr. Pepper is a viable alternative as the industry's number three soda maker. Probably the biggest news as of late for Dr. Pepper is the recent announcement that it made a deal with the Chicago Bears of the National Football League. The company will replace Coke as the sole vendor for carbonated soft drinks in the sponsorship deal that is said to last seven years. In addition, the company will be a title partner of the Bears training camps, working with the team on local promotions. In the short term, Dr. Pepper is teaming up with Marvel’s The Avengers as the company releases collectible cans. As the new movie is released into theaters, Dr. Pepper is also releasing a custom online game and a new commercial. I believe this advertisement, coupled with the long term deal with the Bears, will help Dr. Pepper gain ground against Coke and Pepsi. I do not see the company passing either of these leaders, but it could still close the gap.
Although slightly different from its competitors, Kraft is still a major player in the food and beverage industry. Where the previously mentioned companies focus primarily on beverages and some snack products, Kraft is the leading U.S. food company. Over the past 12 months, the stock has seen an increase of about 15%. One area of concern for the company is the price of food products. As food products begin to rise, it will cause Kraft and other food makers to raise their prices as well. While some companies will be affected by this more than others, Kraft will be able to handle the price increases appropriately. Some of Kraft’s products are inexpensive and are considered staples for consumers. These are the types of products that will be continually purchased even if the price goes up. While higher prices will affect everyone, Kraft will still be able to handle the change. Looking at the stock itself, an S&P analyst raised the rating on Kraft from “hold” to “buy.” This comes after the news that the company will split into two publically traded companies later this year. Because of the split, the analyst believes there will be a valuation boost. The split will separate Kraft into two divisions: one as a dividend payer, and the other the global snack operation, which has better long-term growth potential.
At the current levels, I like all of the companies mentioned above. If I had a portfolio that was diverse enough elsewhere, I would probably own all four of them. However, of the stocks mentioned above, Pepsi is still my favorite. In my opinion, the stock’s current price level makes it slightly undervalued. In addition, it has a higher dividend yield than Coke. Analysts view the stock as staying relatively flat, increasing only a couple of points to a mean target price of around $68. However, in the long term, I do see Pepsi growing. The company recently made a multi-year deal with Family Dollar Stores which will increase Pepsi’s presence in the discount store. This is in addition to the deal Pepsi made with Papa John’s to exclusively serve Pepsi products over Coke. Ultimately, I do not believe Pepsi will be able to dethrone Coke as the world’s leading soft-drink company. I think Coke has too much international growth for that. However, I do believe that Pepsi has room to grow, increasing both the earnings and stock price.
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