As Pepsi Turns to Healthy Products, Is Its Stock a Healthy Investment?

Some investors forget that PepsiCo (PEP -0.41%) is a diversified food and drink conglomerate. Therefore, just comparing it to beverage companies such as the Coca-Cola Company (KO 0.31%) or Dr Pepper Snapple Group (DPS) does not give the full picture of the breadth of its operations. Likewise, just comparing PepsiCo to Mondelez International (MDLZ -0.71%), which has a larger concentration in snacks, is not warranted either.

PepsiCo is home to both food and beverage products that are popular around the world. The company's brands include its traditional Pepsi line of sodas, Mountain Dew, Doritos, and Lay's potato chips. Under Chairwoman and CEO Indra Nooyi, PepsiCo has further divided its products into the "Fun For You" category, which represents traditional snack foods and sugary beverages, and the "Good For You" category, which represents its growing line of healthy products such as Sabra hummus. Moreover, the company's Lay's, Gatorade, Lipton, Tostitos, and Fritos brands each generate over $1 billion per year in revenue.

However, how does PepsiCo stack up valuation-wise against its beverage and snack competitors?

Data Source: Morningstar

Mondelez appears quite expensive with a P/E of 34 as Coca-Cola follows far behind it with a P/E of 22. The S&P 500 currently trades at a P/E of 18 so Mondelez is richly valued in comparison. Only Dr Pepper Snapple trades at a slight discount to the S&P 500's current P/E with a P/E of 17, the lowest among the four companies.

Dr Pepper Snapple is also the bargain of the group on a future basis with a forward P/E of 15. The spread among the forward P/E ratios is not as great, however, as it is with the trailing P/E ratios. Dr Pepper Snapple's P/E of 15 does not greatly exceed the 19 of Mondelez, the company with the highest P/E among the four companies.

Also, the companies' five-year PEG ratios do not differ as vastly as their P/E multiples. Nonetheless, all of the companies seem quite expensive based on this metric as all of them have PEG ratios of over 1. A PEG of 1 indicates a fair valuation and a ratio below 1 indicates a discount. As with the trailing and forward P/E ratios, Dr Pepper Snapple comes out on top with the lowest PEG ratio at 1.9. As previously mentioned, however, Dr Pepper Snapple's PEG of 1.9 is not a resounding call to buy its stock even though this is the lowest ratio among the four.

On a cash flow basis, Coca-Cola is the most expensive while Mondelez steals Dr Pepper Snapple's shine with the lowest valuation. Mondelez's P/CF multiple of 11 comes in slightly ahead of Dr Pepper Snapple's P/CF of 13. The P/CF multiples of Coca-Cola and PepsiCo are not much higher than those of the other two companies, coming in at 16 and 15, respectively.

PepsiCo and the other three are not screaming buys
These valuation metrics show a mixed bag and unfortunately they do not give a clear conclusion as to which company's stock is a better investment. Dr Pepper Snapple looks the most attractive on the trailing P/E, forward P/E, and PEG bases, but loses its luster to Mondelez on a cash-flow basis. Contradictorily, Mondelez is the most highly valued of the four companies on the metrics other than cash flow.

PepsiCo did not appear cheapest among the four on any of the valuation metrics but it did not appear overvalued either. The company's underlying businesses are strong but its stock seems to be a little ahead of its business. Still, the stock offers a nice dividend yield of 3.1% -- but if you are an investor looking for capital appreciation, better opportunities than PepsiCo's stock likely exist given its current valuation.