If you’re like most of America, you’ve probably just had to endure an onslaught of commercials from Doritos. Now, I’m not going to go into the merits of these commercials, because quite frankly I do not really believe in advertising. However I’d like to take this opportunity to remind everyone just how many brands are owned by PepsiCo (NYSE:PEP) since they will be reporting earnings this week (Thursday) and are expected to beat last year’s Q4 by just over 15%.
PepsiCo has dropped $3 or over 4% in the couple of weeks and $63 could make for an attractive entry point for the long term investor. They have a P/E of 16 which is below Coke’s (NYSE:KO) at 19 but above Kraft’s (KFT) at 12. (It should be noted that Coke’s commercials are equally ridiculous, I was thoroughly convinced that the one in the middle of the 2nd was for World of Warcraft until the dragon broke open a bottle). These companies are all competitors but there is a very good chance that they will all still be here 10 to 25 years from now. This makes them a relatively safe place to store cash for that period. Obviously, the more important question is: Is it the best place to invest for that time period? I would argue that PepsiCo does deserve a spot in your portfolio.
Yahoo Finance has a one-year price estimate of $74 on PepsiCo which offers a 16% upside and a steadily rising dividend over the last 5 years currently yielding 3%. I do not give much credence to price targets but PepsiCo’s rising earnings would support a price increase of this nature. In 2009 PepsiCo earned $3.71 a share and estimates have them breaking $4 in 2010. That on top of a bounce off their recent downswing makes $74 very doable. Furthermore, the 3% dividend is very generous for a stock that offers low risk of capital depreciation.
I liken PepsiCo to Johnson & Johnson (NYSE:JNJ) in that their revenue streams are often overlooked. When people think JNJ their minds instantly go to Tylenol and other drugs on recall. But over 50% of JNJ’s revenue comes from medical devices like fake shoulders and hip replacements. (Yes, they are being sued on this front too, but it’s not as widely publicized.) PepsiCo owns Frito-Lay, who in turn owns Sun Chips and Tostitos. That’s basically all of the best chips. Outside of Herr’s and Pringles, there are not really any other widely popular chips. What I am getting at is that PepsiCo has stranglehold on this market, the next step would be trying to figure out if they can make the chip market bigger.
PepsiCo also owns Tropicana and Dole who have a wide variety of selections besides orange juice. Both Pepsi and Coke get knocked for making America fat, because put shortly, soda is not healthy. This is why they both own juice companies; it’s like a hedge on America deciding to become healthier. They also own Naked juice. I’m not sure just how big the national market is for this product since it is sort of expensive, but it is very healthy and very tasty. That brings us to Gatorade, the leader in sports drinks. Powerade can try as it may, but they will always be second fiddle to Gatorade (though Vitamin Water is a legitimate concern). Gatorade also has their new Prime series, which reminds of Go-Gurt. I have yet to try it and there’s a good chance I won’t be anytime soon, but perhaps they have a hit on their hands.
Lastly, PepsiCo owns Quaker Oats, which oversees a lot more than you would think. For instance, Cap’n Crunch and Life cereals along with several snack bar type products and Aunt Jemima syrup. With all of these products, PepsiCo items can be found on the majority of grocery store shelves. PepsiCo offers much more than just soda and through future acquisitions they can continue their dominance on the market.
Disclosure: I am long JNJ.