PepsiCo. (NYSE:PEP)  may be losing the Cola Wars to rival Coca-Cola (NYSE:KO),  but it’s winning the hearts and minds of investors.

The beverage and snacks company reported quarterly earnings on Oct. 16  that were better than Wall Street analysts or activist investor Nelson Peltz, who has called for the company to split itself in two, expected.  Shares of PepsiCo. ,which have gained more than 20% this year compared with Coca-Cola’s 4.8%, traded up on the news rising 2% to $82.27 at the close of the market.  Dr. Pepper Snapple​ (NYSE:DPS), another rival, has edged up about 2% this year.

 Net income in the last quarter at the Purchase,  N.Y.-based company inched up 0.6% to $1.91 billion, or $1.23 per share, as the strength in its snack business outweighed the weakness in its core beverage operations. Adjusted for one-time items, profit was $1.24, beating the $1.17 average estimate of analysts surveyed by Bloomberg.  Revenue jumped 1.5% to $16.9 billion, slightly under the $17 billion expected by Wall Street.

The North American snack divisions' revenue, which includes Frito Lay, rose 7% on a currency neutral basis. Organic revenue in the Latin American snacks business rose by double-digits. PepsiCo. saw gains in volume, value and unit market share in its U.S. salty snacks operation.

During the quarter, PepsiCo. had six of the top 25 new food and beverage introductions and seven of its products are on the pace to achieve $100 million in annual sales including Mountain Dew KickStart, Tostitos Cantina and Starbucks Iced Coffee and Gatorade Frost Glacier Cherry.

The performance may help CEO Indra Nooyi counter efforts by Peltz and other investors to force PepsiCo. to sever its faster growing snacks business from its slower growing beverage operations. Earlier this year, Peltz called on PepsiCo. to acquire Mondalez International (Nasdaq:MDLZ), the parent of Oreo cookies and Trident gum, and merge it with her company’s snack business. Nooyi has rejected the idea, which seems like a good move.  During its latest quarter, Mondalez reported revenue growth that was below its internal projections because of lower coffee prices and struggles in its gum business.

 Nooyi reiterated her position in the earnings conference call.  that the company’s diverse businesses are an asset.

“In challenging times such as these it's especially important to stay focused on execution and that’s really what we’re doing, focusing on the fundamentals to drive good, sustainable performance,” she said.  “…overall our business is on track and we are pleased with the progress we have made strengthening our competitive position across our key developed, developing and emerging markets.”

 The problem that faces PepsiCo.  and rivals including Coca-Cola,  Dr. Pepper Snapple Group is the soda business. Per-capita soda consumption has been on the decline for years thanks, in part, to efforts by public health groups such as the Center for Science in the Public Interest to link its consumption to obesity.  In fact, soft drink consumption has hit a 26-year low.  The industry has been promoting zero and low-calorie alternatives to limited effect.

PepsiCo. trades at a price-to-earnings multiple of 19.39, slightly cheaper than Coca-Cola’s 19.68,  but below Dr. Pepper Snapple’s 15.34.   The average 52-week price target on the maker of Pepsi and Mountain Dew is $90.67, about 10% higher than where it currently trades. Coca-Cola has a 16% potential upside and Dr. Pepper Snapple’s 8%.

The Bottom Line

Based on recent earnings, it seems like Nooyi’s strategy of banking on food and beverages simultaneously is paying off. Carbonated beverages are getting harder and harder to market and growth there will be a challenged for years to come.  PepsiCo., though, is well positioned in the faster-growing sports and energy drink categories thanks to products such as Gatorade and Amp.  The time to buy this stock is now.

Disclosure - At the time of writing, the author did not own shares of any company mentioned in this article.

Related Articles
  1. Personal Finance

    A Day in the Life of an Equity Research Analyst

    What does an equity research analyst do on an everyday basis?
  2. Mutual Funds & ETFs

    ETF Analysis: PowerShares S&P 500 Downside Hedged

    Find out about the PowerShares S&P 500 Downside Hedged ETF, and learn detailed information about characteristics, suitability and recommendations of it.
  3. Mutual Funds & ETFs

    ETF Analysis: ProShares Large Cap Core Plus

    Learn information about the ProShares Large Cap Core Plus ETF, and explore detailed analysis of its characteristics, suitability and recommendations.
  4. Mutual Funds & ETFs

    ETF Analysis: iShares Core Growth Allocation

    Find out about the iShares Core Growth Allocation Fund, and learn detailed information about its characteristics, suitability and recommendations.
  5. Mutual Funds & ETFs

    ETF Analysis: iShares MSCI USA Minimum Volatility

    Learn about the iShares MSCI USA Minimum Volatility exchange-traded fund, which invests in low-volatility equities traded on the U.S. stock market.
  6. Stock Analysis

    Should You Follow Millionaires into This Sector?

    Millionaire investors—and those who follow them—should take another look at the current economic situation before making any more investment decisions.
  7. Professionals

    What to do During a Market Correction

    The market has what? Here's what you should consider rather than panicking.
  8. Mutual Funds & ETFs

    ETF Analysis: Vanguard Mid-Cap Value

    Take an in-depth look at the Vanguard Mid-Cap Value ETF, one of the largest and most popular mid-cap funds in the U.S. equity space.
  9. Stock Analysis

    3 Reasons to Continue to Own Monster Beverage

    Learn more about the Monster Beverage Corporation and some of the primary reasons why investors and market analysts like the stock.
  10. Mutual Funds & ETFs

    ETF Analysis: Schwab US Broad Market

    Take an in-depth look at the Schwab U.S. Broad Market ETF, an incredibly low-cost fund based on a wide selection of the U.S. equity market.
  1. Equity

    The value of an asset less the value of all liabilities on that ...
  2. Hard-To-Sell Asset

    An asset that is extremely difficult to dispose of either due ...
  3. Sucker Yield

    When an investor has essentially risked all of his capital for ...
  4. Earnings Per Share - EPS

    The portion of a company's profit allocated to each outstanding ...
  5. PT (Perseroan Terbatas)

    An acronym for Perseroan Terbatas, which is Limited Liability ...
  6. Ltd. (Limited)

    An abbreviation of "limited," Ltd. is a suffix that ...
  1. What is the difference between called-up share capital and paid-up share capital?

    The difference between called-up share capital and paid-up share capital is investors have already paid in full for paid-up ... Read Full Answer >>
  2. Why would a corporation issue convertible bonds?

    A convertible bond represents a hybrid security that has bond and equity features; this type of bond allows the conversion ... Read Full Answer >>
  3. How does additional paid in capital affect retained earnings?

    Both additional paid-in capital and retained earnings are entries under the shareholders' equity section of a company's balance ... Read Full Answer >>
  4. What types of capital are not considered share capital?

    The money a business uses to fund operations or growth is called capital, and there are a number of capital sources available. ... Read Full Answer >>
  5. What is the difference between issued share capital and subscribed share capital?

    The difference between subscribed share capital and issued share capital is the former relates to the amount of stock for ... Read Full Answer >>
  6. What happens to the shares of stock purchased in a tender offer?

    The shares of stock purchased in a tender offer become the property of the purchaser. From that point forward, the purchaser, ... Read Full Answer >>

You May Also Like

Trading Center

You are using adblocking software

Want access to all of Investopedia? Add us to your “whitelist”
so you'll never miss a feature!