Our latest Focus Stock — which carries our highest recommendation of 5-STARS, or Strong Buy — is PepsiCo (PEP), a global leader in the snack and beverage industry, notes Garrett Nelson, in CFRA Research's flagship newsletter The Outlook.

We view PEP as a high-quality, large-cap value/income name, and it has been proactively investing in faster-growing healthier beverage and snack products to offset declining carbonated soft drink consumption.

In 2020, Pepsi's U.S. operations generated 58% of total net revenue, with its international operations at 42% (Mexico, Russia, Canada, the U.K., China, and South Africa together account for 21% of net revenue). We like the stock for several reasons at current levels, as discussed below.

PEP remains one of our top picks in the Consumer Staples sector for its mix of product and geographic diversification, EPS growth, and yield. With a clear path to $7+ per share in EPS over the next couple of years, we continue to consider PEP a core holding.

We particularly like PEP's Frito-Lay North America segment (26% of revenues and 53% of operating profit in FY 20), which benefited from stay-at- home trends last year, helping offset Covid-19-related softness in soft drink volumes stemming from reduced on-premise sales (restaurants, movie theaters, and other event venues).

PEP's snack exposure gives it a greater degree of diversification than its beverage-only focused rival, The Coca-Cola Company (KO), which we think positions it favorably in the current environment.

PEP's food/snack sales volumes were up 4% Y/Y in FY 20, while beverage volumes were flat. However, in the first nine months of FY 21, beverage volumes jumped 11% due to a recovery in on-premise sales, while food/snack volumes were up 2%.

Recently, PEP successfully passed through higher costs to consumers in the form of price increases, which we believe is a testament to the strength of its various brands. As a result, PEP's net revenue growth has accelerated to 13.2% to date in FY 21, up from the 4.8% growth it posted for FY 20.

PEP's growth from overseas markets has also been particularly strong of late, as its overall organic revenue growth was 8% in the first three quarters of FY 21, but growth was significantly stronger in its Africa, Middle East, and South Asia (+14%); Asia Pacific, Australia/New Zealand, and China (+13%); and Latin America (13%) segments.

In late 2018, PEP named a new chairman and CEO, who we think has taken steps to position the company for stronger growth going forward. Ramon Laguarta took over from Indra Nooyi, who served as CEO for 12 years.

From the outset, Laguarta has pledged to make the company, "Faster, stronger, and better," and we believe its acquisitions of Pioneer Foods ($1.7 billion in July 2019), BFY Brands (undisclosed sum in December 2019), and Rockstar Energy ($3.85 billion in March 2020) reflect a pivot toward higher-growth categories.

Pepsi recently reiterated a commitment to return $5.9 billion ($5.8 billion of dividends / $0.1 billion of share repurchases) to shareholders in FY 21. PEP also recently announced a 5.1% increase in its annualized dividend to $4.30 from $4.09/share effective with the June dividend payment, which we think reflects confidence in its near- and intermediate-term prospects.

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