Pepsi's the Choice

07/27/2010 1:30 pm EST

Focus: STOCKS

James Stack

President, Stack Financial Management

James Stack, president of Stack Financial Management and editor of InvesTech Research, likes the big brand-name purveyor of drinks and snacks.

PepsiCo (NYSE: PEP) [is] often viewed as just another stodgy stock that depends on its flagship soft-drink line to carry the business along. However, PepsiCo is much more than a soft-drink manufacturer. Quaker Oats, Tostitos, Gatorade, and Tropicana are some of its “non-soft-drink” offerings, and each of these megabrands logs $1 billion or more in annual retail sales. In fact, about half the company’s revenue is derived from sales of foods and snacks—not beverages.

Contrary to popular belief, PepsiCo is a growth company. It does business in more than 200 countries, including strategic emerging markets, and is on track to deliver 11%-13% earnings growth in 2010.

Earlier this year, PepsiCo completed the acquisition of its two primary bottlers—Pepsi Bottling Group and Pepsi Americas. This merger gives PepsiCo direct control of 80% of its bottling network, increases its flexibility in bringing innovative and niche products to market, and lowers the cost of operations.

In just a few short months, the company is already recognizing benefits by reducing overhead and streamlining operations and the supply chain. The [unification] of these three companies enables attractive retail combinations of the firm’s multiple food and beverage brands. On top of these operational bonuses, PepsiCo estimates at least $400 million in synergies by 2012, potentially leading to a greater than 10% increase in net income.

PepsiCo has also recently announced plans to invest $2.5 billion in China, considered by management as an exciting market with tremendous growth opportunities. These funds will be used to build manufacturing facilities, open new farms for potatoes and oats, and construct a world class research center in China to develop products for all of Asia.

In another growth move, PepsiCo has recognized the importance of healthier food and drink alternatives. The company currently has a $10-billion business of “good-for-you” products, with plans to grow this appealing segment to $30 billion over the next ten years. These healthier choices range from low-sugar orange juice to baked potato chips and classic hummus.

The stock is attractively valued and currently trades near its 20-year low P/E. Although a growth company, PepsiCo recently increased its dividend 7% and the stock is now yielding 3.1%. It has been resilient during this correction (since April 23, 2010), declining less than half [the amount the Standard & Poor’s 500 fell during that time.]

The firm’s wide array of products and global footprint provide added insurance for this solid consumer staple business. With the stability, value, and growth potential this company offers, we are excited about the prospects for this stock. (It closed Monday below $65—Editor.)

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