Is PepsiCo on the Right Track for a Great Future?

PepsiCo's diversified portfolio and new product development efforts look good to go.

Apr 29, 2014 at 6:14PM

One of the biggest effects of people becoming health-conscious is that the demand for carbonated soft drinks has declined. In fact, sales of carbonated soft drinks in the U.S. dropped 3% last year, according to Beverage Digest. Hence, beverage makers have found it tough to attract people and thus push up their revenues, especially in the U.S. Nonetheless, PepsiCo (NYSE:PEP) contradicted this with first-quarter numbers that came in ahead of the Street's estimates, which has pushed its share price north.

A snapshot of numbers
PepsiCo's revenue, on a comparable basis, jumped 4% over the year-ago period to $12.6 billion to easily beat the consensus estimate of $12.4 billion. One of the key reasons for the top line growth was that PepsiCo increased the prices on its products. The company has also made efforts to introduce new products. However, its beverage segment volume stayed almost flat from the year-ago period.

Although PepsiCo's beverage segment is undergoing a difficult phase, only 25% of the company's total revenue comes from soft drinks. Its food business generates a major chunk of sales with 61% of its total revenue. Its food business volume surged 2% over the prior year's quarter. On the other hand, beverage player Coca-Cola (NYSE:KO) makes 60% of its revenue from soft drinks and provides stiff competition to PepsiCo.

However, Coca-Cola registered lackluster numbers for its recently reported quarter as its revenue dropped 4% to $10.6 billion over last year. Also, its earnings fell to $0.36 per share from $0.39 per share.

On the other hand, PepsiCo's adjusted earnings for the quarter stood at $0.83 per share while its earnings in the year-ago period stood at $0.77 per share. Analysts had expected earnings of $0.75 per share. The sale of higher-margin products, a lower tax rate, and cost-cutting measures drove PepsiCo's bottom line higher.

Strategies undertaken by the beverage players
PepsiCo, Coca-Cola, and Dr Pepper Snapple (NYSE:DPS) were all affected by severe winter conditions in the U.S. during the holiday season, which reduced the demand for soft drinks. Also, because people have become more health-conscious they have shifted away from carbonated soft drinks.

Because of this, these companies have gotten into new products such as bottled water, sports drinks, and juices. Moreover they can charge premiums for these products, which widens their margins.

For example, PepsiCo has introduced Mountain Dew Kickstart, an expensive energy drink which caters to the young demographics. This move has expanded the company's top line as well as its margins.

On the other hand, Coca-Cola has partnered with Keurig Green Mountain to develop Coca-Cola products for the latter's Keurig Cold. This soda maker will allow people to make Coke's beverages at home. This will not only allow people to avoid walking to the stores for soda, it will also reduce their use of plastic bottles. It will be interesting to see how this move affects the sales of PepsiCo and Dr Pepper.

However, Dr Pepper Snapple, which derives 88% of its total revenue from the U.S., is feeling more pain right now. This beverage company has lower market share (17%) in the soft drink market than PepsiCo (28%) and Coca-Cola (42%) and it has been struggling to raise its share. As pointed out by Fool contributor Rick Munarriz, a partnership deal between Dr Pepper and SodaStream that would make Dr Pepper-branded beverages available in SodaStream's beverage maker would prove to be beneficial. The deal, if it's made, would help Dr Pepper expand its footprint in other international markets such as Europe. SodaStream would also benefit from Dr Pepper's product portfolio. 

Key areas of focus
PepsiCo has not limited its efforts to the introduction of health and energy drinks. The company has also introduced "mini-cans" of soda which have helped consumers limit their soda intakes. The company also collects more profit from these mini-cans.

PepsiCo has also stepped up its marketing, especially for new products such as Kickstart, which should help it attract more customers. Additionally, it has sponsored the Super Bowl halftime show and this should prove to be beneficial. Moreover, the demand for soda has been high in emerging markets and Europe as sales in these locations grew by 6% and 7%, respectively.

Lastly, the food and beverage maker plans to introduce soft drinks made with sugar instead of high-fructose corn syrup in the coming months. This move will be quite fruitful for the company and it will give it a competitive edge over other industry players.

Summing it up
PepsiCo's biggest strength lies in its diversified product portfolio. Its food business has been doing well as it continues to add to the company's top line. Furthermore, the company's efforts in the beverage segment have also paid off, as is evident from its better-than expected results. These results occurred in spite of the decline in demand and cold weather conditions in the U.S. Moreover, the company's increased marketing spending, new products, and soft drinks made with sugar will help its future results. With the summer setting in, I believe PepsiCo is worth an investment.

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Pratik Thacker has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola. The Motley Fool owns shares of Coca-Cola, PepsiCo, and SodaStream 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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