PepsiCo No Joke

Soft drink and snack food powerhouse PepsiCo (NYSE: PEP) started its fiscal year with an outstanding quarter. Earnings jumped 15% on an 11% gain in sales, while free cash flow (net income plus depreciation and amortization, minus capital spending) rocketed 116% higher. Judging from these results, the Atkins and South Beach diets aren't hurting Pepsi.

North American operations did well, but it was growth in overseas sales and profits -- 19% and 34%, respectively -- that was most bubbly. Among the highlights, the company experienced "explosive growth in India" for snack foods.

Operating margins, meanwhile, are improving but still no match for those delivered by archrival Coca-Cola (NYSE: KO). On the other hand, PepsiCo still beats competitor Cadbury Schweppes (NYSE: CSG) on the margin front.

As always, the question is valuation. Pepsi's guidance of $2.29 per share for the year puts the stock at 24 times forward earnings, which seems reasonable enough given the strong performance in recent years. The company is also projecting $3.4 billion in "management operating cash flow" (net cash provided by operations, minus capital spending).

To translate that to the more useful metric, free cash flow (FCF), we simply annualize this quarter's $275 million in depreciation and amortization (non-cash) expenses, then add back the resulting $1.1 billion to arrive at $4.5 billion in 2004 FCF. That puts PepsiCo at roughly 21 times estimated FCF, which, based on the S&P 500's average of 23 times, again seems reasonable.

To its credit, PepsiCo plans to use some of that cash to buy back $7 billion of its shares over the next three years. It also recently announced a 44% increase in the annual dividend to $0.92 a year (a 1.7% yield). Bravo.

Truly a great company, Pepsi seems to be pretty fairly priced. Investors looking for big names and solid growth but less bubbly forward price-to-earnings ratios might consider Procter & Gamble (NYSE: PG) or Johnson & Johnson (NYSE: JNJ) -- heck, even Microsoft (Nasdaq: MSFT) or IBM (NYSE: IBM). Go figure.

Interested in discussing the prospects of beverage and snack food companies with other investors? Try The Motley Fool's PepsiCo discussion board.

Fool contributor W.D. Crotty owns stock in PepsiCo and was sorry to learn that Fritos, the snack of choice at the Crotty household, saw declines in sales.