Why PepsiCo Doesn’t Need SodaStream

Some investors fear that Coca-Cola could be getting a leg up on PepsiCo with the Green Mountain deal, but PepsiCo could still be the better investment.

Mar 11, 2014 at 7:33AM

The beverage market really is a battle of two companies: PepsiCo (NYSE:PEP) and Coca-Cola (NYSE:KO), the two largest beverage companies in the world. This battle is making its way into consumers' kitchens. Coca-Cola has inked a deal with Green Mountain Coffee Roasters (NASDAQ:GMCR), which has the potential to do for cold beverages what the Keurig has done for hot beverages.

Home beverages present a big opportunity
Shares of Green Mountain got a massive lift on the news, up more than 40% in a single day; trading at levels that the company hasn't seen in more than three years. Meanwhile, because of the Coca-Cola and Green Mountain deal, there's new speculation that PepsiCo might make a deal with SodaStream. The question has now become what does this mean for PepsiCo?

PepsiCo investors are still focusing on a potential deal with SodaStream. This would help position PepsiCo in the home-beverage market and be an answer to the Coca-Cola and Green Mountain deal. When asked about potentially answering Coca-Cola's move into home beverages, PepsiCo CEO Indra Nooyi said, "Green Mountain is one option. Interestingly, there are multiple, multiple, multiple technologies out there." Is SodaStream one?

Even if it isn't, PepsiCo is a great investment
PepsiCo continues to be a best-in-breed consumer-goods stock. Billionaire and activist investor Nelson Peltz is still calling for the breakup of the beverage and snacks segments of PepsiCo. However, PepsiCo has reiterated that it plans on keeping the business intact.

It remains to be seen how the Peltz situation will shake out. But it's not only the snacks business that is appealing for investors; it's also emerging markets. Investors also be encouraged by the fact that PepsiCo can grow the profitability in its North American beverage business by rationalizing its manufacturing and distribution processes, which comes as the company has significant extra capacity. Ultimately, the rightsizing of capacity should help boost margins.

PepsiCo still generates nearly half of its revenue from outside the U.S. and is investing in emerging markets. Over the last five years, PepsiCo has managed to triple its revenue from emerging markets. PepsiCo saw double-digit sales gains in Latin America and Asia last quarter. The ultimate goal is to increase emerging market revenue to account for more than two-thirds of revenue.

 What to expect in 2014 and beyond
While PepsiCo is the No. 2 player in beverages globally, behind Coca-Cola, it is the global leader in salty snacks. Its key brands include Doritos, Cheetos, and Lay's. Its growing snacks business is helping to offset its sluggish beverages business. The plan is to shift its business mix to rely more on snacks. And going forward, the company expects two-thirds of its growth to come from snacks.

The other positive for PepsiCo is that it's growing its presence in nutrition businesses. This includes its nutrition brands Tropicana, Gatorade, and Quaker. This is a big positive as consumers shift toward good-for-you and health and wellness products.

Stacking up the shares
PepsiCo trades at 16.5 times next year's earnings estimates. Shares are up only 6% over the last year compared to the S&P 500 index's 22%. Meanwhile, Coca-Cola trades at 17 times next year's earnings. Investors remain attracted to shares of both Coca-Cola and PepsiCo for their dividends, yielding 2.9% and 2.8%, respectively. However, analysts expect PepsiCo to grow earnings a bit faster than Coca-Cola. Wall Street expects PepsiCo to grow earnings at an annualized 7.6% over the next five years; meanwhile, Coca-Cola is expected to grow at an annualized 6.4%.

Bottom line
While Coca-Cola is the leader in the carbonated-beverage market, PepsiCo is a formidable competitor and compelling investment. Investors can get exposure to both the beverages and snacks markets by investing in PepsiCo. I look for PepsiCo to continue its shift toward snack foods and expansion into emerging markets, which should provide for multi-year market-beating returns.

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Marshall Hargrave has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola, Green Mountain Coffee Roasters, and PepsiCo. The Motley Fool owns shares of Coca-Cola and PepsiCo and has the following options: long January 2016 $37 calls on Coca-Cola and short January 2016 $37 puts on Coca-Cola. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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