Seeking Alpha
Long/short equity, deep value, growth, growth at reasonable price
Profile| Send Message|
( followers)  

Summary

  • PepsiCo’s “make-your-own-drink” dispenser will improve beverage sales in the developed markets.
  • Emerging markets will provide long-term growth opportunities to PepsiCo.
  • PepsiCo’s productivity improvements initiative will improve the company’s margins in the coming years.
  • PepsiCo’s stock is currently undervalued.

PepsiCo Inc. (NYSE:PEP) is the second largest food and beverage company in the world with $66 billion in revenues. The company has twenty two brands that generate over $1 billion in revenues. Those brands include Pepsi, Aquafina, Tropicana, Frito Lay, Gatorade and Quaker Oats. An additional 40 brands deliver between $250 million and $1 billion in revenues. However, over the last few years, revenues for PepsiCo's beverage division have declined in the developed markets because consumers have shifted their beverage preferences from high calorie and carbonated soft drinks (CSD) to healthier alternatives. Apart from trying to accelerate beverage sales in the developed markets, PepsiCo has recently launched a range of new self-serve equipment for dispensing drinks in places like restaurants, movie theaters, and college dining halls.

Make Your Own Drink

The company has recently launched "Pepsi Spire", a new drink dispenser that could make the company competitive in a domain long-dominated by the Coca-Cola soda fountain. Pepsi Spire is a portfolio of innovative fountain beverage dispensers that allow consumers to create more than 1,000 customized carbonated and non-carbonated beverages with the touch of a button, while giving food service operators a choice of flexible and cost-effective equipment to pick from to best to meet their needs. The Pepsi Spire lineup currently includes three models, each designed to meet a specific set of food service customer needs:

  1. Pepsi Spire 1.1 is a countertop self-service unit that allows consumers to create up to 40 beverage combinations.
  2. Pepsi Spire 2.0 is a countertop self-service unit that allows consumers to create up to 500 beverage combinations.
  3. Pepsi Spire 5.0, which is launching soon, allows consumers to create more than 1,000 beverage combinations using a 32-inch touchscreen.

Pepsi Spire will provide greater freedom of choice and create a new experience with an old product. Pepsi Spire is now available at select U.S. locations and will continue to roll out through 2014.

Emerging Economies Provide Growth

While the demand for carbonated drinks continues to decline in most developed markets, this segment is still growing in the emerging economies in Asia, the Middle East, and Africa. PepsiCo invested aggressively over the last few years in these markets. Recently, the company announced it planned to make a $5 billion investment in Mexico. Mexico is crucial for PepsiCo as it is the company's third largest market behind the U.S. and Russia. The investment is designed to further strengthen the company's food and beverage business in Mexico; Mexico is one of the most attractive markets in Latin America with a growing middle class and numerous opportunities for long-term economic growth. PepsiCo's food division has generated around $3.8 billion from Mexico in fiscal year 2013, up 10% year-over-year. Mexico's food sales translated into 11.3% of all food revenues for the company and around 47% of food sales from Latin America last year.

In addition, PepsiCo also announced a plan to invest more than $5.5 billion in India over the next six years to expand its Indian operations. The company already has 38 bottling plants and three food plants in India and through this investment the company hopes to widen its food and beverages offerings in the country to cater to the evolving needs of Indian consumers. Furthermore the company has eight brands in the country that generate more than $160 million in annual revenue. PepsiCo will increase its infrastructure in India in an effort to increase its selling and delivery capabilities with a particular focus on rural markets. The company intends to provide resources to its farming program which caters to 24,000 farmers resources like seeds, expertise, insurance, and loans.

PepsiCo's Productivity Savings Plan

PepsiCo announced its five-year productivity savings plan for 2015-2019 according to which the company plans to save $1 billion each year by optimizing global manufacturing operations and simplifying organization systems to drive efficiency. PepsiCo is on course to draw an incremental $1 billion in savings this year, after saving $900 million in 2013, as part of its savings program for the period of 2012-2014.

Shareholder Profits

PepsiCo is sharing its success with its shareholders with its consistently growing dividend and optimal payout ratio. The dividend grew at a CAGR of 10.32% over the past ten years. The stable business, with its strong and consistent cash flow streams and consistent payout of dividend, is all that a long-term investor is looking for.

(click to enlarge)

Source: Morningstar.com

Valuation

On the basis of fundamentals, the stock is currently undervalued. Currently, the stock is trading at a lower trailing twelve-month P/E ratio of 20.07X, compared to the industry average P/E of 34.58X. In addition, the company's operating margin currently stands at about 14.83%, compared to the industry average of 6.12%. The net profit margin of 10.43% is more than double the industry average of 3.78%. Furthermore, the ROA and ROE metrics also indicate that the company is using its assets and funds more efficiently than its peers in the industry. The company's ROA of 9.07% is greater than the industry average of 4.12% and the ROE of 30.29 also beat the industry average of 9.56.

Conclusion

PepsiCo is a shareholder friendly business with consistently growing dividends. In addition,the emerging markets will provide significant growth in the coming years and improve the company's top and bottom lines. Pepsi Spire will also boost the company's beverages sales in the U.S. and strengthen the company's position in the beverage market. Furthermore, PepsiCo's productivity improvement initiatives have already saved billions of dollars for the company and will continue to do so in the coming years. Currently, the stock is trading at a lower P/E compared to the industry. Considering all of this, PepsiCo appears to be one of the best beverage stocks to buy.

Source: PepsiCo: One Of The Best Beverage Stocks