Time to Buy PepsiCo?

| About: PepsiCo Inc. (PEP)

PepsiCo. Inc. (NYSE:PEP) manufactures, markets, and sells snacks and beverages worldwide. It operates through four divisions: Frito-Lay North America, PepsiCo Beverages North America, PepsiCo International, and Quaker Foods North America. The Frito-Lay North America division offers snacks, including Lay's potato chips, Doritos tortilla chips, Cheetos cheese flavored snacks, branded dips, Fritos corn chips, Ruffles potato chips, Quaker Chewy granola bars, SunChips multigrain snacks, Rold Gold pretzels, Grandma's cookies, Frito-Lay nuts, Munchies snack mix, Gamesa cookies, Funyuns onion flavored rings, Quaker Quakes corn and rice snacks, Miss Vickie's potato chips, Stacy's pita chips, Smartfood popcorn, Chester's fries, and branded crackers.

The PepsiCo Beverages North America division offers beverage concentrates, fountain syrups, and finished goods, under various brands, such as Pepsi, Mountain Dew, Gatorade, Tropicana Pure Premium, Sierra Mist, Propel, Tropicana juice drinks, Dole, SoBe Life Water, Naked juice, and Izze. This division also offers ready-to-drink tea, coffee, and water products through joint ventures with Unilever and Starbucks, as well as licenses the Aquafina water brand to its bottlers.

The PepsiCo International division offers salty and sweet snack brands, including Gamesa, Lay's, Doritos, Walkers, Cheetos, Ruffles, and Sabritas; Quaker brand cereals and snacks; and beverage concentrates, fountain syrups, and finished goods under the brands Pepsi, 7UP, Mirinda, Mountain Dew, Gatorade, and Tropicana.

The Quaker Foods North America division offers cereals, rice, pasta, and other branded products, including Quaker oatmeal, Aunt Jemima mixes and syrups, Life cereal, Cap'n Crunch cereal, Quaker grits, Rice-A-Roni, Pasta Roni and Near East side dishes. The company distributes its products through direct-store-delivery, broker-warehouse, and food service and vending distribution networks. The company was founded in 1898 and is headquartered in Purchase, New York.

In a market full of turmoil, Pepsi has been a relatively safe harbor over the last several years. However, since the beginning of the year, it's gone from $79.30 to $64, tumbling right along with most other stocks as the market has been merciless to all. With this pull back, it's a good time for conservative investors to delve into Pepsi's fundamentals.

First, its valuation is extremely appealing. The P/E ratio is 19.2, a level it hasn't seen since 1995. The relative P/E of 1.1 also is at the low end of its range over the last 20 years. The beta is a comforting .7 (beta measures a stock's movement compared to the S&P 500 index over the last year...a stock moving more than the index has a beta over 1, moving less than the index, a beta less than 1). There's also some comfort in size. With $106 billion in market cap, Pepsi certainly has that. The best measure though is financial strength. Pepsi carries an A++ rating and has only 20% of debt in its capital structure.

Over the last 5 years, Pepsi delivered ever increasing earnings, up an average of 12% a year. In 2005, it reported $2.69, then $3.00, followed by $3.34. This year analysts see $3.73, then $4.12 next year. The range for this year is $3.66 to $3.75, for next year $4.07 to $4.22. For this quarter (reporting July 23), look for $1.02 and next quarter $1.10. Over the next 5 years, analysts predict earnings growth, on average, to be 10.5%.

Sales are being spearheaded by Pepsi International (NASDAQ:PI). In 2007, it increased revenues by 22%, partly because of the weak dollar. With very little improvement in the dollar vs other currencies, this division should continue to show good results. The company also bought several smaller foreign food and beverage companies in the last year that will contribute to sales in PI.

Net operating margins may be squeezed this year as raw material costs, especially for commodities like corn syrup, have increased. However, management is taking an aggressive role and will raise prices and focus on efficiencies to combat those costs. Also, to increase earnigs per share, it's using part of cash flow to buy back stock, as much as $4.3 billion worth.

Other key numbers: Book Value is $10.57. Return on equity is an impressive 36% with analysts forecasting 37% next year. Dividend is $1.70 for a yield of 2.6%. Net income available to common shares is $5.7 billion. There's $2.6 billion in cash.

Pepsi was caught in the downdraft that took almost every stock lower over the last 6 months. It may be a very good time for conservative investors to dig deeper into this stellar company which isn't dependent on the U.S. for sales (40% came from international in 2007). If price hikes stick with the consumer, rising commodity costs will be passed through. But if competition keeps its prices fixed or customers balk at the new levels, Pepsi will see margins shrink for a while.

Disclosure: none

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