PepsiCo Passes Investor's Taste Test

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By Adil Yousuf

PepsiCo (PEP) announced better than expected earnngs. Its stock jumped more than 3% after reporting earnings. The company is in the midst of a revitalization that is getting a lot of attention from investors. With the stock up more than 20% this year and the company having fared well relatve to Wall Street's expectatons, the big question remains: Is PepsiCo a better investment than Coca-Cola (KO)?

For Q1 2013, PepsiCo posted Earnings of 77 cents a share beating consensus estimates of 71 cents a share. Sales also rose 1% to $12.6 billion, surpassing estimates of $12.5 billion. However, Q1 net income fell 4.6% to $1.08 billion from $1.13 billion a year earlier. The drop in net income was mainly due to unfavourable currency fluctuations 1.

Earnings Report - Main HIghlights:

  • PepsiCo Americas Foods (PAF) business grew organic revenue by 6%
  • European operations, combining snacks and beverages, yielded a 4% revenue growth
  • AMEA (Africa, Middle East, and Asia) business units (snacks + beverages combined), generated 15% organic revenue growth

Unfortunately, the U.S. beverage market continued to be a drag on the company. The PepsiCo Americas Beverage unit suffered volume and net revenue declines, which is consistent with what we've seen from Coca-Cola. Carbonated drinks have been a challenging product for the entire industry, particularly in developed markets as consumers gravitate more towards water, tea, and sports-performance drinks.

Fortunately, PepsiCo's international markets are driving growth for the company. International revenue is now 50% overall revenue versus 45% in 2008.

Simply put, Coca-Cola does beverages, while PepsiCo does much more. This is especially important in an era when soda consumption in America is declining. True, the decline can be offset by increased consumption in emerging markets, but PepsiCo's diversification seems to give it an edge.

Based on Market IQ's proprietary Fundamental metrics, PepsiCo is expected to Outperform its peers. Market IQ characterizes PepsiCo as a good Value, but low Quality stock (see below).

For more insights, visit the Market IQ blog.

 

The above Quality - Value chart consists of the following companies: PepsiCo (PEP), Coca-Cola (KO), Coca-Cola Femsa S.A.B. de C.V. ADS (KOF), FOMENTO ECONOMICO MEXICANO S.A.B. DE (FMX),and Cocacola Enterprises Inc. (CCE).

 

Market IQ's Valuation metrics suggest that PepsiCo is cheaper than 72% of its peers - With a Price to Forward EPS of 17.79 and a Price to Cash Flow multiple of 14.4, PepsiCo is attractively priced among its peer group 2. Additionally, both these metrics compare favourably to its closest competitor Coca-Cola 3, indicating better investment Value associated with PepsiCo.

PepsiCo's fundamental stock Quality is worse than 61% of the companies in its peer group. Market IQ quantifies Quality by evaluating company's Profitability, Estimate Momentum and Financial Strength. PepsiCo has a low Quality number, mainly due to relatively weak revenue growth and weak Financial standing in its peer group.
  • Despite its growing revenue, the company underperformed when compared with the industry average. Since the same quarter one year prior, revenues increased by 1.2%. This growth in revenue does not appear to have trickled down to the company's bottom line, displayed by a decline in earnings per share 4.
  • PepsiCo has Equity to Debt ratio of 0.53, which is lower than the industry average of 1.4, indicating weak Financial Sstrength when compared to its peers.

 

For 2013, PepsiCo expects to deliver approximately $900 million in productivity savings as part of their three-year, $3 billion productivity program, which will fund future growth investments and further enhance operating margins. The company also announced a new $10 Billion share repurchase program from July 1, 2013 through June 30, 2016 - indicating management's confidence in the company's future.

Recently, with activist investor, Nelson Peltz disclosing stakes in PepsiCo and Mondelez International Inc. (NASDAQ:MDLZ), there is growing speculation on the street that the billionaire investor might push for nuptials between the two giants. This is a near term catalyst that could help drive the shares higher.

While Coca-Cola has been a leader in the beverage industry, the company faces headwinds to its continued brand dominance due to lack of diversification. Where as Pepsi, through its diversified existing portfolio of brands and attempt to enter into new product categories (recently filed a patent for a protein drink 5), is poised for greater potential growth in the future.

1Venezuela's decision to devalue its currency negatively impacted PepsiCo's net income last quarter.

2The snack and soda industry has an average Forward EPS of 20.69 and a Price to Cash Flow multiple of 19.48.

3Coca-Cola has a Price to Forward EPS of 18.75 and a Price to Cash Flow multiple of 15.73.

4Current net Earnings total trailed by $50 million when compared with the year - ago quarter.

5PepsiCo began the Global Nutrition Group to deliver breakthrough products. Recently the company filed a patent to produce a Protein based drink which could potentially be a huge success in the months to come.

 

This commentary is for informational purposes only and does not constitute investment advice. The opinions offered herein are not recommendations to buy, sell or hold securities. Market IQ expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.



The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of The NASDAQ OMX Group, Inc.



This article appears in: Investing , Investing Ideas , Business , Stocks

Referenced Stocks: CCE , FMX , KO , KOF , MDLZ , PEP

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