In this article, let's take a look at Pepsico, Inc. (PEP, Financial), a $138.17 billion market cap company, which is a major international producer of branded beverage and snack food products.
Emerging Markets
The company is the world's largest snack food company, having a dominant share of the world's salty snack market. I still think the company will continue with good prices policies, although carbonated soft drinks will face some troubles in developed markets due to health concerns and a shift to non-carbonated beverages.
The company plans to expand on BRIC countries, and it is very important because they are the fastest growing food and beverage markets in the world. We believe Pepsi will enjoy growth because successful marketing campaigns will increase its revenues and global market share significantly.
The snacks segments also hold a strong position, representing two-thirds of the market in Brazil and 46% in the U.K.
Main Risks
When we analyze risks to the company, we can think about the decline in the industry last year, where volumes fall more than average price increases. If this trend continues this year, this could be dramatic for PepsiCo. Moreover, regulations can hurt the firm´s revenues. For example, a new tax on sugary drinks has impacted volumes in Mexico.
Further, new consumer´s health concerns are the explanation of the declining U.S. soda consumption. It is very possible that consumers are probably not purchasing high-calorie branded sodas.
Revenues, Margins and Profitability
Looking at profitability, revenue grew by 1.82% and led earnings per share increased in the most recent quarter compared to the same quarter a year ago ($1.32 vs $1.23). During the past fiscal year, the company increased its bottom line. It earned $4.32 versus $3.92 in the previous year. This year, Wall Street expects an improvement in earnings ($4.60 versus $4.32).
Finally, let´s compare the best measure of performance for a firm's management: the return on equity. The ROE is useful for comparing the profitability of a company to that of other firms in the same industry.
| Ticker | Company | ROE (%) |
| PEP | PepsiCo | 29.96 |
| KO | The Coca-Cola Company | 24.29 |
| DPS | Dr Pepper Snapple Group, Inc | 30.98 |
| MDLZ | Mondelez International, Inc. | 10.98 |
| Ă‚ | Industry Median | 9.79 |
The company has a current ROE of 29.96% which is very similar to the one of Dr Pepper Snapple Group, Inc. (DPS, Financial) and higher than the one exhibit by The Coca-Cola Company (KO, Financial) and Mondelez International, Inc. (MDLS). In general, analysts consider ROE ratios in the 15-20% range as representing attractive levels for investment. It is very important to understand this metric before investing and it is important to look at the trend in ROE over time.
Relative Valuation
In terms of valuation, the stock sells at a trailing P/E of 20.9x, trading at a discount compared to an average of 24.9x for the industry. To use another metric, its price-to-book ratio of 6.18x indicates a premium versus the industry average of 2.68x while the price-to-sales ratio of 2.18x is above the industry average of 1.31x.
As we can see in the next chart, the stock price has an upward trend in the five-year period. If you had invested $10,000 five years ago, today you could have $18,109, which represents a 12.7% compound annual growth rate (CAGR).
Final Comment
Strong competition makes companies to generate more volume outside the U.S. In the U.S. the snacks businesses is very profitable, generating 38% of total revenue in 2013 and more than a half of total operating profits. This promising segment should contribute about two thirds of the company’s future growth. I continue to believe that PepsiCo has the ability to reach new markets and meet new customer needs, who are more health conscious.
Further, the PE relative valuation and the return on equity that significantly exceeds the industry average make me feel bullish on this stock.
Hedge fund gurus like Paul Tudor Jones (Trades, Portfolio), Ray Dalio (Trades, Portfolio), George Soros (Trades, Portfolio), Tom Gayner (Trades, Portfolio), Ken Fisher (Trades, Portfolio) and Mario Gabelli (Trades, Portfolio) added this stock to their portfolios in the second quarter of 2014, as well as PRIMECAP Management (Trades, Portfolio), HOTCHKIS & WILEY and Diamond Hill.
Disclosure: Omar Venerio holds no position in any stocks mentioned
