DRIP PORTFOLIO
Is Pepsi a Rule Maker?

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By Jeff Fischer (TMF Jeff)
June 14, 2000

The Rule Maker Portfolio has specific criteria that qualify companies for the coveted Rule Maker status, and the port's managers periodically update a long list of all the Rule Maker companies that the Foolish community follows. This list doesn't have Pepsi (NYSE: PEP) on it. Let's see if it should.

Following are the qualities that Rule Makers must display and how Pepsi rates in each!

Dominant brand. Pepsi is the second-most popular soda seller in the world and has several leading brands in its stable, including Mountain Dew and 7UP, though 7UP is overseas only via a partnership. Pepsi's snack food division, Frito-Lay, is the world leader with many leading products, including Cheetos, Tostitos, Lay's, Rold Gold, and Doritos. Pepsi's Tropicana is the orange juice leader in the United States. Overall, Pepsi has a stable of absolutely dominating brands, and a stable of second-placers.

Repeat-purchase business. I've yet to meet anyone who is not a repeat purchaser of beverages and snack foods. Brian Graney buys two jumbo bags of chips daily and eats them at his desk (one for breakfast, one for lunch).

Convenience. Tom Gardner writes, "To establish Rule Maker authority, a business must position its products as the most accessible and convenient in its industry." Pepsi's largest product, Frito-Lay, is easily the most accessible and "convenient" in the country, and also in much of the world. Pepsi beverages are typically easily accessible, too, although not to such a degree as Coca-Cola. Coca-Cola especially beats Pepsi in this category in most international locations.

Expanding possibilities. Rule Makers ask, "Do my friends know about and use the company's products? Is worldwide expansion believable for their stuff?" In Pepsi's case, the answers are "Yes" and "Yes." Pepsi-Cola International Beverages grew operating profits 30% last quarter, while Frito-Lay International grew operating profits 27%. Pepsi-Cola North America grew revenue 4% last quarter but operating profits dropped 8%. Frito-Lay North America grew revenue 6% and operating profits 10%. Expanding possibilities do exist overseas and, to a lesser degree, at home. But they do exist.

Your familiarity and interest. This Rule Maker criterion proposes that "you'll dramatically improve your chances of scoring above-average investment returns if you weed out the unfamiliar [businesses] and concentrate on companies whose products, marketing approach, management, and reputation with customers you'll enjoy following." In answer to this, we do have a strong familiarity with Pepsi's brands after our long company study, and, as customers, we have vested, personal interest. If we were to invest in the company, our invest would rise several-fold further.

The first five qualities that we just ran through are the qualitative factors that Rule Makers seek from companies. The next five Rule Maker criteria are quantitative. They are:

  • Sales growth of at least 10%
  • Gross margins of at least 50%
  • Net profit margins of 7% or greater
  • Cash no less than 1.5x total debt
  • Flow Ratio below 1.25
  • Cash King Margin of at Least 10%

We'll run Pepsi through these numerical criteria Friday. To discuss this column, visit us on the Drip Companies board.

Fool on!

P.S. It's your last day to play Stock Madness for a chance to win a $1,000 BUYandHold.com account or a Dell computer. Even if you don't win, it's fun to play!

Related Links:

  • Rule Maker's 11 Steps
  • Rule Maker's Criteria
  • Rule Maker Master List
  • Drip Portfolio

    6/14/2000 Closing Numbers
    Ticker Company Day Chg % Chg Price
    CPBCAMPBELL SOUP3/160.60%$31.25
    INTCINTEL CORP-5 1/16-3.85%$126.44
    JNJJOHNSON & JOHNSON3/41.99%$89.75
    MELMELLON FINANCIAL CORP3/41.90%$40.13

      Day Week Month Year
    To Date
    Since
    7/28/1997
    Annualized
    Drip -1.09% 1.46% 1.74% 26.59% 64.47% 18.84%
    S&P 500 .07% .93% 3.52% .09% 56.64% 16.84%
    S&P 500(DA) .07% .93% 3.52% .09% 59.27% 17.52%
    S&P 500(DCA) n/a n/a n/a n/a 27.77% 8.87%
    NASDAQ -1.39% -2.00% 11.66% -6.68% 141.94% 35.86%

    Trade Date # Shares Ticker Cost/Share Price LT % Val Chg
    9/8/199722.9909INTC45.671$126.44176.84%
    11/5/199834.9399MEL34.051$40.1317.84%
    11/14/199714.965JNJ78.923$89.7513.72%
    4/13/19988.337CPB54.179$31.25-42.32%

    Trade Date # Shares Ticker Cost Value LT $ Val Ch
    9/8/199722.9909INTC$1,050.02$2,906.91$1,856.90
    11/5/199834.9399MEL$1,189.74$1,401.96$212.22
    11/14/199714.965JNJ$1,181.08$1,343.11$162.03
    4/13/19988.337CPB$451.69$260.53($191.16)
      Cash: $0.05  
      Total: $5,912.57  


    Key
    • S&P 500 (DA) = dividend adjusted. Dividends have been added to the total return of the index.

    Note
    Drip Port launched with $500 on July 28, 1997, adds $100 to invest every month, and the goal is to own $150,000 in stock by August of the year 2017. Due to the slow nature of dollar-cost-averaging and our relatively significant starting costs, we do not expect to seriously challenge the S&P 500 for the first three to five years as we build an investment base. The long-term advantages of dollar-cost-averaging still overcome the short-term disadvantages, however. Final note: our investment in Campbell Soup is frozen due to fees instituted in its investment plan. Click here for a history of all Drip Port transactions.