PepsiCo Hits a New High

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

Better-than-expected fourth quarter results have pushed up the PepsiCo (NYSE: PEP) share prices and the stock attained its 52-week high Feb. 26. The stock is currently trading at 15.85 times its forward earnings, and offers investors an attractive 28.7% ROE.  Better yet, there are still more upsides yet to be factored in to the stock. The company’s diversified product range, iconic brands, global presence, and the ongoing restructuring initiative makes PepsiCo a solid investment proposition.

Earnings

PepsiCo surprised investors with earnings of $1.66 billion, or $1.06 per share, in the fourth quarter, against $1.42 billion or $0.89 per share a year ago.

While reported revenue was down 1% at $19.95, organic revenue climbed 5% on the back of 9% growth in developing and emerging markets. This beat analyst estimates of $1.05 per share on revenue of $19.7 billion, driving up the stock price.

In contrast, archrival Coca Cola’s (NYSE: KO) results were essentially a mixed bag, beating on earnings and missing on revenue. Coca Cola has reported net income of $1.87 billion or $0.41 per share in the fourth quarter, against $1.66 billion or $0.36 per share last year. Revenue increased by 4% percent to $11.46 billion. Analysts were expecting earnings of $0.44 per share on revenue of $11.53 billion. Global volumes were up 3% below analyst expectations of around 3.9%.

Diversified products
Unlike Coca Cola, which is a pure beverage play, PepsiCo has a solid foothold in the snack foods segment. In today’s world of health-consciousness, the cola giants are left with no other option but to diversify into non-carbonated drinks and other food segments. I

PepsiCo seems to be ahead of Coca Cola here, with a thriving snack-foods business which posted solid 9% organic growth in the fourth quarter. Brands like Quaker and Lays have an almost cult following in many of its markets. The company has a strong presence in the non-carbonated drinks and juices segments as well, with brands like Gatorade and Tropicana.

Coca Cola is also increasing its foothold in the non-carbonated ‘still beverage’ market with an array of ready-to-drink tea and coffee, juices and juice drinks, sports drinks,  energy drinks, and packaged water.

Global presence

PepsiCo has a well-established presence across the globe, with half of its revenue coming from outside the US.

In the fourth quarter, the company achieved 9% organic growth in the emerging and developing countries. The strongest results came from beverage refranchising in China and Mexico, and these two markets saw revenue growth over last year, even on a reported basis.

Both PepsiCo and Coca Cola are making heavy investments in China, which remains a relatively untapped market, with consumption of cola and other soft drinks far below US levels. It is estimated that annual per-person beverage consumption is around 230 bottles, while for the US, it is 1,500 bottles.

PepsiCo is currently gaining from its alliance with Tingyi Holding, China’s largest food and beverage company. Together with Tingyi, PepsiCo is marketing all its beverages in China, with a planned investment of $2.5 billion over the next three years.

This alliance is proving to be the biggest challenge for Coca-Cola, which is also eyeing China as its growth driver. Coca-Cola plans to invest $30 billion across the globe through 2017; China and India would receive sizable chunks of this spend.

Cost Management

PepsiCo took to cutting costs in 2012, primarily to combat the soaring raw material expenses and its own increased spending on marketing and advertising. The company’s strategy of trying to pass on the cost increases to consumers wasn't very successful.

As part of its restructuring initiative, Pepsi announced 8,700 layoffs in 2012, approximately equal to 3% of its global workforce. Through the job cuts, as well as other cost management programs, the company achieved cost savings of over $1 billion in 2012. The cost management programs are ongoing, and PepsiCo is aiming to achieve productivity savings of $3 billion by 2015.

Last Word

PepsiCo offers a solid investment proposition for its long-term investors, and the stock has received considerable investor attention since the start of 2013. These solid earnings proved to be the icing on the cake, driving the stock to achieve its 52 week high. Despite its current valuations, the stock offers more upsides, thanks to its diversified portfolio, highly popular brands, global footprint, and ongoing restructuring program.


tinade has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of 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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