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Can PepsiCo Nourish Your Portfolio?

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Thanks to the acquisition of two key bottlers, PepsiCo's (NYSE: PEP  ) quarter looked a bit messy. But let's be honest: We don't really care about what happened. We only care about what's going to happen.

Pepsi's core earnings per share were $1.22, in line with what analysts were expecting. Boring, right? I told you.

And to be clear, when I talk about "what's going to happen," I'm not referring to the company's lowered top end of its 2010 growth projections, which has driven the stock's decline. That news is not ideal, but come on: You shouldn't be tracking PepsiCo on a quarter-to-quarter basis anyway. You need to look at the much bigger picture.

For PepsiCo, the most obvious brand -- its namesake cola -- is very low on the company's list of potential growth drivers, particularly in its home U.S. market. Sure, Pepsi can win some important market-share points as it continues to duke it out with Coca-Cola (NYSE: KO  ) for U.S. supremacy. But it's a very low likelihood that colas on American soil will drive significant growth for either company.

Meanwhile, Pepsi's bottler acquisitions are expected to help the bottom line by driving efficiencies. But if cost efficiencies are PepsiCo's most exciting opportunities, we have little to look forward to here.

Fortunately, that's not the case. Savory snacks and beverages -- fizzy and otherwise -- are still PepsiCo's 800-pound gorilla, and emerging markets present the company with a huge opportunity. During PepsiCo's most recent quarter, the Latin American region as a whole performed well, and countries like Russia, China, India, Turkey, and Indonesia helped drive volume gains in both snacks and beverages.

Additionally, the company is pushing the "nutrition and healthy living" angle hard. During the quarter, it created the Global Nutrition Group -- a move designed to help drive CEO Indra Nooyi's vision of growing nutrition revenue from $10 billion to $30 billion by 2020.

That seems like a pretty interesting angle, considering the size and growth of that market segment. And unlike Altria (NYSE: MO  ) , which has no hope of tapping the health-conscious consumer, PepsiCo's product portfolio -- which includes brands such as Gatorade, Tropicana, and Quaker -- does give the company a shot at selling a health-conscious image.

Of course, convincing consumers of the nutritional benefits of its products is only part of Pepsi's battle. It also has to fight the same foes assailing other brand giants like Procter & Gamble (NYSE: PG  ) are facing: private-label competitors from retailers like Target (NYSE: TGT  ) and Safeway (NYSE: SWY  ) .

Personally, I happen to think that Nooyi's nutritional target is not only commendable, but also achievable. Combine that with growth in emerging markets, and the dribs and drabs the company can pick up in more penetrated markets, and I think analysts' 9%-per-year earnings growth target for Pepsi is achievable.

But of course, the real question is what the company's $66 stock price means in light of that prediction. I'd say that it's unlikely that Pepsi's stock will be unhealthy for investors' portfolios. It's a strong, well-run company with an enduring moat and a growing dividend yielding 2.9%.

At the same time, I wouldn't call the stock a bargain. At this price, it can probably deliver decent returns. But for those set on beating the market, there are better opportunities to jump on right now, while you wait for a better price on Pepsi.

I'm not convinced that Pepsi is a buy at present, but my fellow Foolish analysts think these five stocks are ready to be bought right now.

Coca-Cola is a Motley Fool Inside Value recommendation. Coca-Cola, PepsiCo, and Procter & Gamble are Motley Fool Income Investor choices. The Fool owns shares of and has written covered calls on Procter & Gamble. Motley Fool Options has recommended a diagonal call position on PepsiCo. The Fool owns shares of Altria Group and Coca-Cola. Try any of our Foolish newsletter services free for 30 days.

True to its name, The Motley Fool is made up of a motley assortment of writers and analysts, each with a unique perspective; sometimes we agree, sometimes we disagree, but we all believe in the power of learning from each other through our Foolish community.

Fool contributor Matt Koppenheffer owns shares of Coca-Cola, but does not own shares of any of the other companies mentioned. You can check out what Matt is keeping an eye on by visiting his CAPS portfolio, or you can follow Matt on Twitter @KoppTheFool or on his RSS feed. The Fool's disclosure policy assures you that no Wookiees were harmed in the making of this article.

Read/Post Comments (2) | Recommend This Article (10)

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On October 08, 2010, at 9:54 PM, HayleyTMF wrote:

    I think you're right on target Matt re. your comments and observations about PepsiCo.

    I love this company and we've got a great leader

    in Indra Nooyi.

    She's about 10 steps ahead of other CEOs

    no matter what the industry.

    Thanks for posting this very useful information.


  • Report this Comment On October 10, 2010, at 12:47 PM, SteveTheInvestor wrote:

    Well run company indeed, and I agree as to the stock's current potential. I've been waiting a long time to buy into Pepsi. I wasn't paying attention and missed a buy when it dropped into the $50's earlier this year. Personally, I plan to start thinking about buying in small chunks below $64, but not before then. At that price, I'll get my mandatory minimum of a 3% yield, with some potential for capital gains.

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