Consistent growth sets PepsiCo apart

10/6/2008


  Recent Price
$71
  Dividend
$1.70
  Yield
2.4%
  P/E Ratio
20
  Shares (millions)
1,612
  Long-Term Debt as % of Capital
27%
  52-Week Price Range
$79.79 - $63.28

PepsiCo’s ($71; NYSE: PEP) per-share profits have risen in each of the last 10 years, growing at an annualized rate of 12% during that period.

Such steady growth warrants a premium price, particularly during a period of market upheaval. But at 18 times estimated year-ahead earnings of $3.89 per share, PepsiCo trades below its five-year average forward P/E of 19. Consensus estimates project per-share-profit gains of 11% in 2008 and 10% in 2009, fairly safe targets for the Forecasts’ top pick in the defensive consumer-staples sector. PepsiCo is a Buy and a Long-Term Buy.

Business breakdown
PepsiCo, one of the world’s largest producers of food and beverages, operates four divisions. PepsiCo Beverages North America (26% of 2007 sales, 28% of operating profit) makes carbonated and noncarbonated beverages, with such powerful brands as Pepsi, Gatorade, Tropicana, and Aquafina. Frito-Lay North America (29%, 36%) produces snack foods. Brands include Fritos, Lay’s, Cheetos, and Doritos. PepsiCo International (40%, 29%) sells beverages and snacks in more than 200 countries and currently represents the company’s strongest growth engine. Quaker Foods (5%, 7%) makes cereals and rice and pasta products. PepsiCo’s product portfolio includes 18 brands that each generate $1 billion or more in annual sales.

The popularity of carbonated soft drinks has waned in recent years. PepsiCo has adapted to that trend by investing heavily in noncarbonated beverages, such as juices, bottled water, and fitness drinks. The company has also changed its product mix to profit from America’s health kick, introducing low-fat and low-calorie snack foods.

High commodity prices affect all food and beverage makers. But PepsiCo — with its geographic diversity and broad product lineup — is better positioned than most to withstand the pressure. PepsiCo has also recouped some of its higher costs through price increases — in some cases reducing the weight of products without changing their prices.

In the June quarter, international revenue jumped 25%. Overseas operations have benefitted from acquisitions and the weakness of the dollar, but they also generate substantially higher organic growth than the North American business. Snack volume rose 10% in the June quarter, with beverage volume up 13%. Contributing to growth is the company’s increasing focus on such fast-growing emerging markets as India, China, and Russia. In September, the company announced an investment of $500 million in India over the next three years. Management expects revenue from India to triple by 2013.

Conclusion
PepsiCo earns a Quadrix® Overall score of 74, lower than we normally prefer for Buy-rated stocks. The stock scores well in Quality, Financial Strength, Momentum, and Performance, while low scores for Value and Earnings Estimates drag down the Overall rank. However, PepsiCo is a high-quality company with solid recent results and a well-defined growth profile over the next several years. PepsiCo adds defensive ballast to both the Buy List and Long-Term Buy List — without sacrificing growth. An annual report for PepsiCo Inc. is available at 700 Anderson Hill Road, Purchase, NY 10577; (914) 253-2000, www.pepsico.com.


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