Gotta Have Pepsi Stock
03/04/2008 12:00 am EST
Michael Brush, contributor to MSN Money, tells why he thinks shares of PepsiCo and one of its bottlers are attractive now, given their likely growth and the slowing economy.
For years, PepsiCo (NYSE: PEP) has wrangled with the gnarly problem of the declining popularity of bubbly soft drinks. But its stock was never supposed to lose its fizz during economic hard times.
Instead, steady consumer demand for cheap and tasty salty snacks such as Lay's and Doritos chips and drinks like Gatorade and Lipton tea were supposed to produce predictable earnings, making PepsiCo a defensive stock.
Yet PepsiCo shares [are] down 10% from a peak reached January 10th. And shares of bottler PepsiAmericas (NYSE: PAS) are down even more.
Investors, of course, had to have some reasons to pick on PepsiCo. They see rising commodity costs. They fear that the company may be losing its knack for inventing innovative tasty snacks and drinks that win over consumers.
But I can't really see that anything has gone so terribly wrong at either company, so I think both stocks look like a buy in the current weakness.
Indeed, PepsiCo will most likely keep producing reliable earnings, winning over investors as economic conditions continue to soften. The company expects commodity costs overall to advance 6% this year. And it will get help from impressive growth in international markets.
"All categories of comfort food and refreshing beverages have generally proved pretty resilient in past economic downturns," said PepsiCo’s chief executive officer Indra Nooyi. "Our brands have highly loyal and engaged consumers. Our brands are affordable treats and healthy eats."
[The numbers] don't look so bad, either. In the fourth quarter, PepsiCo met expectations even after investing heavily abroad for growth. It posted a 17% gain in revenue and an 11% increase in operating profit. The company had double-digit growth in snacks and drinks in emerging markets.
PepsiCo has stuck with 2008 guidance of at least 10% earnings growth—one reason that Credit Suisse analyst Carlos Laboy has a Buy rating and an $87-a-share price target on the company's stock, which recently traded for around $70.
PepsiCo bottler PepsiAmericas got hammered for a slightly different reason: last year, the bottler turned into a momentum play, thanks to 26% earnings growth largely coming from international strength. So when the company guided down slightly in January, the [momentum] players exited, and the stock got hit hard.
For this year, the company expects overall revenue growth of 13% to 15%. It should all add up to earnings growth of 7% to 10%, which should capture investors' attention if the US continues to see sluggish economic growth, as many economists forecast.
Again, I think the weakness offers a good entry point for long-term investors, and at least one insider agrees. In early February, PepsiAmericas’ CEO Robert Pohlad bought more than $10 million worth of stock for around $25.50 a share, according to Thomson Financial, or just slightly below the recent price under $26.Click here for the full article…