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The sugary food and beverage industry has been under assault for quite some time, really hammering many stocks' earnings reports. However, PepsiCo, Inc. (NYSE: PEP ) has probably been the most proactive major brand in moving away from sugar-driven products and into more "healthy" offerings. We can see some of this move in its earnings report.
Revenues were $19.53 billion, and that's on organic growth of 2.3%. That number is similar to same store sales. Given the maturity of this industry, a 2.3% increase in organic sales is quite respectable. Much of this was driven by strong gains in the Europe Sub-Saharan Africa division and Asia/Middle East/North Africa, both offering 6% organic increases.
Those in turn came on the heels of 7% and 5% increases, respectively, in food/snacks and -3% and -2%, respectively, in beverages.
Indeed, Frito-Lay North America saw a 5% organic sales increase. It's food that's growing, while beverages are still struggling. North American beverages saw a 3% organic decline.
PEP stock has benefited from its dedicated move to a wholesales reconfiguring and reimagining of the nutritional content of its entire product line. Pepsico's communications include this statement:
- Innovating and reformulating our products to reduce added sugars, sodium and saturated fat
- Increasing number of more nutritious options into our portfolio
- Providing clear labeling information about product ingredients
- Adhering to responsible marketing policies
- Meeting the highest standards for food quality and safety
Sticking to sugar, which gets the most attention, PEP stock aims that, by 2025, "at least two-thirds of our global beverage portfolio volume will have fewer than 100 calories from added sugars per 12-ounce serving."
That's down from about 140 calories now. To give you an idea in context, Rockstar Energy Drink has 186, Red Bull has 160, Vitamin Water has 75, Snapple Lemon Iced Tea has 138, Minute Maid Lemonade has 210, apple juice has 156, and Westsoy Vanilla Soy Milk has 48.
So that would take Pepsi's beverages significantly down the scale.
It's easy to scream that 2025 is too far away. But remember that PEP stock has tons of beverage brands and people's tastes across entire countries and continents differ. And we are talking about changing formulations for things - that's some challenging chemistry to deal with.
The flavor houses that accomplish this have to delicately balance sugar, sodium, and saturated fat, while juggling the actual flavors themselves. It isn't an easy task.
As for saturated fats, PEP stock also aims that, by 2025, "three-fourths of our food portfolio will have saturated fat levels that do not exceed 1.1g/100 calories."
Bottom Line on PEP Stock
Which brings us to whether Pepsico stock is a buy or not. It seems to me that PEP stock is now a classic Peter Lynch stalwart - growing earnings at about 8% annually. If I gave it every possible premium bump to its deserved price-earnings ratio, I could only get it to 12x earnings as being a reasonable price. Yet the problem here is that even if I gave PEP stock a very, very generous 15x P/E - on next year's earnings of $5.67 no less - I can't justify a Pepsi stock price of more than $85 per share.
PEP stock trades at $112.
Sorry, Pepsi. Glad you're trimming the fat from your foods, but your stock price needs some weight loss, too.
Lawrence Meyers is the CEO of PDL Capital, a specialty lender focusing on consumer finance and is the manager of The Liberty Portfolio at www.thelibertyportfolio.com. He does not own any stock mentioned. Meyers has 23 years' experience in the stock market, and has written more than 2,000 articles on investing. He can be reached at TheLibertyPortfolio@gmail.com.
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