So far in 2011, beverage and snack food giant Pepsico's (NYSE:PEP) stock is badly lagging its peers. Its share price performance is firmly in negative territory and trending below the market for the year. This reflects a couple of near-term and overblown worries about its businesses. Longer-term, investors should be able to count on operating performance more in line with what Pepsi has reported over the past decade. (For more, read Using Historical Volatility To Gauge Future Risk.)

Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Recent Results Recap
Pepsi released second-quarter results back in July that saw reports sales rise 14% to $16.8 billion. Excluding the February 2011 acquisition of Wimm-Bill-Dann, a leading food and beverage firm based in Russia, sales rose a more modest 8%. Growth was balanced across the beverage and snack food businesses and highlighted by double-digit growth in Latin America. The only segment to report negative growth was Quaker Foods in North America, though the fall was modest at 1%.

Net income rose 18% to $1.9 billion for an impressive net margin of 11.3%. Share buybacks boosted earnings per diluted share by 20% to $1.17. For the first two quarters of the year, earnings were relatively flat at $3 billion while operating cash flow fell 3.6% to $2.3 billion. However, higher capital expenditures, due in part to the acquisition of the capital intensive domestic bottling businesses, sent free cash flow down nearly 24% to $1.1 billion.

Analysts currently project full-year sales growth of more than 15%, total sales of nearly $67 billion and earnings of $4.44 per share. During its second quarter update, Pepsi said it "is targeting high-single-digit earnings per share growth" for the full year.

At the current share price, Pepsi trades at a forward P/E of less than 14. This is a reasonable level at the bottom of the earnings multiple range over the past five years and reflects weaker performance of the flagship Pepsi cola in the United States. Coca Cola (NYSE:KO) is seeing stronger trends of its flagship brands, including the newly released Coke Zero brand while rival Dr. Pepper Snapple (NYSE:DPS) has grown more competitive since being spun out from Cadbury Schweppes. The remaining portion of Cadbury was recently acquired by Kraft (NYSE:KFT) which, along with Quaker Oats and other rivals including General Mills (NYSE:GIS) have also been struggling with food commodity inflation.

The Bottom Line
Despite the nearer-term worries, Pepsi should be able to grow both sales and profits in the low double digits over time. It has averaged annual growth of just over 10% over the past five and ten-year periods but has seen annual earnings growth slow to less than 5% on average over the past three years. The acquisition of Pepsi Bottling and PepsiAmericas adds higher capex needs and could continue to dent free cash flow generation, but is projected to help boost beverage competitiveness in North America over time. Higher food cost concerns should also subside over time. (For more on the increasing cost of food, check out Commodities That Move The Markets.)

Use the Investopedia Stock Simulator to trade the stocks mentioned in this stock analysis, risk free!

Tickers in this Article: PEP, KO, DPS, KFT, GIS

comments powered by Disqus

Trading Center