The Giant Becomes a Super Giant

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

American food and beverage giant, PepsiCo Inc. (NYSE: PEP) released its earnings for 4Q12 on Feb. 14.

PepsiCo’s Earnings

Pepsi beat its market estimates for the fourth quarter and reported earnings of $1.66 billion or $1.06 per share, up from 4Q11’s earnings of $1.42 billion or $0.89 per share. As a result, the company has announced plans to repurchase stocks worth $10 billion. The stock repurchase program will be from July 1, 2013, to June 2016.  Moreover, the company has also announced it will increase its dividend by 5.6% to $2.27 per share, beginning in June.

According to the company, one of the major reasons behind its great performance was an increase in sales volume and prices. Further, the company’s renewed branding and excessive spending on advertisement also had a significant effect on sales.

In the fourth quarter, the company saw a 5% growth in its organic revenue. However, it was up 9% in the developing and emerging markets. In Russia, organic revenue grew by 10% while it was up 7% in Mexico. In the Asian market, PepsiCo’s recent partnership with Tingyi gave the company a further market share of almost 1.5 times.

Moving on to the products, Pepsi Next, which has 60% less sugar than the traditional cola, saw more than $100 million in sales during the year. The company’s 60-calorie sparkling beverage, Starbucks Refreshers, and Gatorade Energy Chews also had a great year. Talking about snacks, Doritos Locos Tacos reported record sales of more than 325 million shelves. As the company is all set to launch more products in 2013, the company expects even more from its partnership with Taco Bell.

In 2013, the company expects earnings per share to increase 7% to $4.39 per share while the revenues are forecasted at $68.2 billion.

Valuation

PepsiCo is trading at a forward P/E (1-year) of 16.43x , depicting the fact that it’s slightly more expensive than its rival, Coca-Cola (NYSE: KO). Further, it’s yielding a dividend of 3% on its stock. Using an average forward industry P/E (1-year) of 16.8x, Iwould value PepsiCo. However, as PepsiCo is expected to outperform its industry in the coming years, I would use a 15% premium while valuating the company.

Using consensus estimates, I value PepsiCo at $85. Hence, it is a hugely undervalued stock and has an upside potential of almost 17.5%. Adding its dividend yield in this gives us a total return of more than 20%. Therefore, PepsiCo is one of the most attractive buys in the carbonated soft drinks industry.

Competitors

On Feb. 12, Coca-Cola released its earnings for the fourth quarter of 2012. The company earned $0.41 per share, up 13% from the same quarter last year. The company is currently trading at a forward P/E (1-year) of 15.61x and has a dividend yield of 2.7%. It has a PEG of 2.02 and a growth rate of almost 9.3%; hence, a strong PEGY of 1.56.

Using earnings multiple in the case of Coca-Cola, I value it around $43. Therefore, it has an upside potential of almost 17%. Adding its dividend yield into this upside potential, I get to a total return of almost 20%. Hence, it’s a perfect buy at this point in time. You can have a further look at my detailed take on Coca-Cola here.

Dr Pepper Snapple Group (NYSE: DPS) announced its earnings for 4Q12 on Feb. 13. The company reported earnings of $0.82 per share on revenues of $1.48 billion. Analysts had expected DPS to earn around $0.85 per share. As a result, the stock was down more than 6% after the announcement.

The main reason behind DPS missing its estimates was a below par performance in the North American region. Moreover, the company expects to earn below analysts’ forecast in 2013 amid high raw materials cost. DPS is currently trading at $42.80 and has a mean recommendation of 2.6 on the sell side; hence, it doesn’t seem to be an attractive buy. Moreover, as it’s facing tough competition from the big two, it won’t be easy for the company to mint substantial profits in the years ahead. Hence, I remain neutral on Dr Pepper Snapple Group.

Conclusion

There is still a lot of growth potential in the carbonated soft drinks industry other than the colas. The colas haven’t shown substantial growth in the past few years as consumers have been able to find good substitutes in the beverage market. As a result, PepsiCo’s investing a lot on its non-cola segment.

Currently, PepsiCo has some of the best brands in juices, isotonics, ready-to-drink teas, coffees and waters. These products have not only done well in the past few years but are expected to do really well in the coming years. Further, the company has some great upcoming products that are currently going through FDA review. Once these products get into the market, PepsiCo’s profits would definitely get multiplied. As a result, PepsiCo is expected to outperform its competitors in the coming years. Therefore, PepsiCo along with Coca-Cola are the best buys in the beverage industry. In short, I recommend buying PepsiCo for an upside of at least 17%.

 


Vamosrafa7 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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