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.
Strong Position
The company is organized into three business units with six reportable segments: PepsiCo Americas Foods (PAF), which includes Frito-Lay North America (FLNA), Quaker Foods North America (QFNA), and Latin America Foods (LAF); PepsiCo Beverages America (PAB), which includes PepsiCo Beverages North America and all of its Latin American beverage businesses; and PepsiCo International, which includes all of PepsiCo businesses in Europe and Asia, the Middle East and Africa (AMEA).
Thanks to its Frito-Lay division, the firm is the world's largest snack food company, having a dominant share of the world's salty snack market.
Main drivers
I 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.
In an industry with relatively high barriers to entry, its relationships with major retailers and strong brand are drivers for future growth. Moreover, brands such as Gatorade and Tropicana are expected to drive volume gains in a growing market.
International markets
PepsiCo’s snacks segments (which accounts for half of revenue) also hold a strong position. For example, it representstwo-thirds of the market in Brazil and 46% in the U.K.
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. So this promising segment should contribute to more or less two-thirds of the company’s future growth.
BRIC countries
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. Successful marketing campaigns will increase its revenues and global market share significantly.
A major risk
Turning our attention to potential risks, volumes are critical. I think this after the decline in the industry last year, where volumes fall more than average price increases. So if this trend continues this year, this could be dramatic for PepsiCo.
Revenues, margins and profitability
Looking at profitability, revenue growth by 0.5% led little earnings per share increase in the most recent quarter compared to the same quarter a year ago ($1.29 vs $1.28). During the past fiscal year, it increased its bottom line by earning $4.32 versus $3.92 in the prior year. This year, Wall Street expects an improvement in earnings ($4.58 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 | 27.76 |
| KO | The Coca-Cola Company | 25.88 |
| DPS | Dr Pepper Snapple Group, Inc | 27.40 |
| MDLZ | Mondelez International, Inc. | 12.09 |
| Â | Industry Median | 10.34 |
The company has a current ROE of 27.76%, which is 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 of20.4x, trading at a discount compared to an average of 30.2x for the industry. To use another metric, its price-to-book ratio of 5.9x indicates a premium versus the industry average of 3.5x while the price-to-sales ratio of 2.1x is above the industry average of 1.44x.
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 $18,015, which represents a 14.5% compound annual growth rate (CAGR).
Final comment
Strong competition surrounds this industry where companies are struggling to generate more volume outside the U.S. I think 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 Ray Dalio (Trades, Portfolio), Tom Gayner (Trades, Portfolio), Ken Fisher (Trades, Portfolio), Mario Gabelli (Trades, Portfolio) and Diamond Hill added this stock to their portfolios in the second quarter of 2014.
Disclosure: Omar Venerio holds no position in any stocks mentioned
