PepsiCo After Earnings: Buy, Hold, or Sell?

PepsiCo is generating solid financial performance, and the stock is fairly valued in comparison to that of competitor Coca-Cola. Is PepsiCo a good purchase for your portfolio?

Apr 18, 2014 at 7:00AM

Brands

Source: PepsiCo.

PepsiCo (NYSE:PEP) reported better-than-expected results for the first quarter of 2014, and the company is outgrowing rival Coca-Cola (NYSE:KO) thanks to its strength in the snacks division and presence in healthy categories. Is PepsiCo a buy, hold, or sell after reporting earnings?

Sparkling performance
PepsiCo reported sales of $12.62 billion for the first quarter of 2014, versus an average estimate of $12.47 billion from Wall Street analysts. This was nearly flat in comparison to the first quarter of 2013, but results were negatively affected by factors such as operations refranchising in Vietnam and unfavorable currency movements.

Excluding these factors, organic revenue grew by 4% on the back of a 5% growth rate in the global snacks division and a 1% growth rate in organic global beverages sales.

Structural changes and currency fluctuations had a big impact on performance in emerging markets. PepsiCo reported a 2% decline in U.S. dollar sales in that segment; however, organic revenues in emerging markets grew by 9% when adjusting for these variables.

The company reported net pricing gains of 3% during the quarter, while total sales volume increased by 1% versus the same quarter in the prior year. In terms of volume, snacks sales grew by 2%, while beverages were flat versus the prior year.

Reported earnings per share increased by 15% to $0.79, better than the $0.75 per share forecast on average by Wall Street analysts. Core constant currency earnings per share increased by 10% versus the prior year, reflecting sound financial performance when adjusting for transitory factors.

Excluding the impact of structural changes and currency fluctuations, management is forecasting organic sales to increase in the mid single digits during 2014 and core constant currency earnings per share to grow by 7% versus 2013.

On Feb. 13 the company announced a 15% increase in dividends, marking the 42nd consecutive year of growing dividends for PepsiCo, and bringing the dividend yield to approximately 3.1% at current prices.

Management is planning to return nearly $8.7 billion to shareholders via dividends and buybacks in 2014, a big increase of 35% versus 2013, so capital distributions should be a considerable driver of investors' returns in the coming quarters.

Growth and valuation
PepsiCo trades at a P/E ratio of 19.6, fairly in line with historical averages for the company and with rival Coca-Cola, which trades at a P/E ratio of 21.3. Dividend yields are also quite similar: PepsiCo pays 3.1% and Coca-Cola carries a dividend yield of 3.2%.

There is one important difference, though: PepsiCo is doing better than Coca-Cola because of its strength in snacks, which provides diversification and additional opportunities for growth in a world in which soda consumption is under heavy pressure due to health considerations, especially in big markets such as the U.S.

Coca-Cola reported a decline of 1% in worldwide soda sales during the first quarter of 2014. The company compensated for this decline with growing volume of noncarbonated drinks, so total sales volume grew 2% during the period.

Still, Coca-Cola is underperforming PepsiCo when it comes to both sales and earnings growth. Reported revenues fell 4% during the first quarter of 2014, while sales excluding the impact of currency fluctuations and structural changes increased by 2% year over year.

Coca-Cola reported a decline of 6% in earnings per share during the quarter, even if comparable currency-neutral earnings per share did considerably better, with a 5% increase versus the first quarter of 2013.

Coca-Cola has enough brand power, marketing resources, and global scale to adapt to changing consumer habits with an increased presence in categories such as water, sports drinks, juice, and tea. This means that the company will most likely be able to reignite growth in spite of stagnant soda sales in the medium term.

Still, PepsiCo's presence in snacks and its portfolio of healthy brands, including worldwide leaders such as Tropicana, Quaker, and Gatorade, are proving to be valuable strategic assets for the company and its shareholders.

For a similar valuation to that of Coca-Cola, PepsiCo is offering higher growth rates, so the company is looking like a good alternative in terms of valuation versus financial performance.

Buy, hold or sell?
PepsiCo is a big player in a mature industry, so it's not easy for the company to generate growth. However, financial performance is quite solid, capital distributions are a big source of returns for shareholders, and the company is fairly valued against rival Coca-Cola. For investors looking for a sound and reliable performer, PepsiCo looks like strong candidate to consider.

The best dividend stocks for the long term
The smartest investors know that dividend stocks simply crush their non-dividend-paying counterparts over the long term. That's beyond dispute. They also know that a well-constructed dividend portfolio creates wealth steadily, while still allowing you to sleep like a baby. Knowing how valuable such a portfolio might be, our top analysts put together a report on a group of high-yielding stocks that should be in any income investor's portfolio. To see our free report on these stocks, just click here now.

 

Andrés Cardenal has no position in any stocks mentioned. The Motley Fool recommends and 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.

1 Key Step to Get Rich

Our mission at The Motley Fool is to help the world invest better. Whether that’s helping people overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we can help.

Feb 1, 2016 at 4:54PM

To be perfectly clear, this is not a get-rich action that my Foolish colleagues and I came up with. But we wouldn't argue with the approach.

A 2015 Business Insider article titled, "11 websites to bookmark if you want to get rich" rated The Motley Fool as the #1 place online to get smarter about investing.

"The Motley Fool aims to build a strong investment community, which it does by providing a variety of resources: the website, books, a newspaper column, a radio [show], and [newsletters]," wrote (the clearly insightful and talented) money reporter Kathleen Elkins. "This site has something for every type of investor, from basic lessons for beginners to investing commentary on mutual funds, stock sectors, and value for the more advanced."

Our mission at The Motley Fool is to help the world invest better, so it's nice to receive that kind of recognition. It lets us know we're doing our job.

Whether that's helping the entirely uninitiated overcome their fear of stocks all the way to offering clear and successful guidance on complicated-sounding options trades, we want to provide our readers with a boost to the next step on their journey to financial independence.

Articles and beyond

As Business Insider wrote, there are a number of resources available from the Fool for investors of all levels and styles.

In addition to the dozens of free articles we publish every day on our website, I want to highlight two must-see spots in your tour of fool.com.

For the beginning investor

Investing can seem like a Big Deal to those who have yet to buy their first stock. Many investment professionals try to infuse the conversation with jargon in order to deter individual investors from tackling it on their own (and to justify their often sky-high fees).

But the individual investor can beat the market. The real secret to investing is that it doesn't take tons of money, endless hours, or super-secret formulas that only experts possess.

That's why we created a best-selling guide that walks investors-to-be through everything they need to know to get started. And because we're so dedicated to our mission, we've made that available for free.

If you're just starting out (or want to help out someone who is), go to www.fool.com/beginners, drop in your email address, and you'll be able to instantly access the quick-read guide ... for free.

For the listener

Whether it's on the stationary exercise bike or during my daily commute, I spend a lot of time going nowhere. But I've found a way to make that time benefit me.

The Motley Fool offers five podcasts that I refer to as "binge-worthy financial information."

Motley Fool Money features a team of our analysts discussing the week's top business and investing stories, interviews, and an inside look at the stocks on our radar. It's also featured on several dozen radio stations across the country.

The hosts of Motley Fool Answers challenge the conventional wisdom on life's biggest financial issues to reveal what you really need to know to make smart money moves.

David Gardner, co-founder of The Motley Fool, is among the most respected and trusted sources on investing. And he's the host of Rule Breaker Investing, in which he shares his insights into today's most innovative and disruptive companies ... and how to profit from them.

Market Foolery is our daily look at stocks in the news, as well as the top business and investing stories.

And Industry Focus offers a deeper dive into a specific industry and the stories making headlines. Healthcare, technology, energy, consumer goods, and other industries take turns in the spotlight.

They're all informative, entertaining, and eminently listenable ... and I don't say that simply because the hosts all sit within a Nerf-gun shot of my desk. Rule Breaker Investing and Answers contain timeless advice, so you might want to go back to the beginning with those. The other three take their cues from the market, so you'll want to listen to the most recent first. All are available at www.fool.com/podcasts.

But wait, there's more

The book and the podcasts – both free ... both awesome – also come with an ongoing benefit. If you download the book, or if you enter your email address in the magical box at the podcasts page, you'll get ongoing market coverage sent straight to your inbox.

Investor Insights is valuable and enjoyable coverage of everything from macroeconomic events to investing strategies to our analyst's travels around the world to find the next big thing. Also free.

Get the book. Listen to a podcast. Sign up for Investor Insights. I'm not saying that any of those things will make you rich ... but Business Insider seems to think so.


Compare Brokers