Fearful About Double Dip? 2 Brand Name Stocks To Buy

By David Gould - August 29, 2012 | Tickers: KO, PEP | 0 Comments

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While Fed Chairman Ben Bernanke recently testified that he does not foresee a double dip, the market continues to treat equities as though there is a major volatility ahead. This has led investors to back strong brand name growth stocks that offer defense against uncertainty, as evidenced by elevated multiples in firms like Coca-Cola (NYSE: KO) and PepsiCo (NYSE: PEP) When fears begin to dissipate, I expect investors to return to "high-risk" financial and biotech stocks that offer meaningful upside. Thus, I recommend striking a happy medium between buying brand name companies and diversification in uncertain industries. Investors should consider lightly buying shares in PepsiCo and Coca-Cola. Below, I review the fundamentals of each of these companies.

PepsiCo

PepsiCo is the cheapest of the three companies on a multiples basis with a respective PE and forward PE multiple of 17.4x and 15.8x. This is due to poor execution over the past few years (the stock underperformed Coca-Cola by 3,660 bps over the past 5 years) and a weaker brand image. Many shareholders have rightfully called for the dismissal of Chairman & CEO Indra Nooyi, or at least an independent Chairman that does not have a direct link with management (whom they pay). PepsiCo currently offers a 3.1% dividend yield with a low beta of 0.5.

On the positive side, I am attracted to the company's wide diversification across the food and beverage industry. They own Lay's, Ruffles, Doritos, SunChips, Quaker oatmeal, Aunt Jemima syrups, Cheetos, 7UP, Tostito's, and, of course, Pepsi, among others. This top brand provides a sustainable stream of free cash flow.

This stock will improve its brand portfolio even more when it opens a dairy line that directly targets positive secular trends in the United States. Whether it’s proposed regulations on soda size in New York City or greater concern over the effects of obesity, soda consumption has numerous headwinds to an upward trend. PepsiCo has already succeeded in the dairy market outside of the United States, but this doesn't necessarily translate to domestic success. Cultures are notorious for having differing beverage tastes, and PepsiCo's population with soda and junk food might not fly too well for those wanting to "build up bones". The firm will be partnering with Theo Mullar Group in Germany to release yogurt, which has become an increasingly popular food, in the United States.

Coca-Cola

Coca-Cola is one of the Street's favorite stocks with a rating of a "buy" (source FINVIZ.com) despite elevated multiples of 20.4x and 17.3x past and forward earnings, respectively. For a company heralded for its defensiveness, Coca-Cola has a fairly low dividend yield of 2.7% and high leverage with a net debt position of $15.5B, or 8.9% of market value.

Investors should instead buy Coca-Cola as a reliable grower. Over the past 5 years, the iconic beverage producer yielded 7.9% annual EPS growth; it is expected to yield 9.6% annual growth over the next 5. This means 2016 EPS of around $5.58, which, at a 17x multiple, translates to a future stock value of $94.86. Discounting backwards by 7% yields a present value of $67.63, suggesting that the company is overvalued. No matter, Coca-Cola will remain more of a growth than a value play. A 4% annualized stock return plus 2.7% in dividend yields is pretty attractive when complemented by 50% less volatility than the broader market!

Fundamentally, Coca-Cola is also on the right track. Quality performance has been strong while high single-digit to double-digit expansion in emerging market point to and upside story. India grew spectacularly well at north of 20%. FX headwinds may hold back some value creation, but it won't deter further penetration and the company's ability to cross-promote new product lines. At the same time, management remains committed to returning free cash flow to shareholders.

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