Pepsi Is Ready for the Future of Foods & Beverages

PepsiCo has a strategy to capitalize on the trends in food, snacks, and beverages, but does its valuation make it a good investment?

Jul 11, 2014 at 5:00PM

PepsiCo (NYSE:PEP) is uniquely positioned to benefit from the trends in not only healthier drinking but healthier eating as well. The beverage and food conglomerate's CEO, Indra Nooyi, has pivoted Pepsi to compete in both the healthy and snack food markets. As Pepsi puts it, its food and drink products are organized into either its "Good For You" category or its "Fun For You" category. 

Pepsi's "Good For You" products contain fruits, vegetables, whole grains, reduced sodium, sugar, and fat contents, as well as other natural ingredients. The company's Tropicana line of fruit juices is included in its "Good For You" category and the brand generates over $1 billion per year in revenue. The company's Quaker Oats line of products is also in Pepsi's healthy category and generates over $1 billion in revenue per year as well. Pepsi's "Good For You" category also contains its Gatorade products and its relatively new line of hummus products under the brand name Sabra, which is a rapidly growing brand for Pepsi. 

In addition to its "Good For You" products, Pepsi still maintains a slew of its traditional products under its "Fun For You" category, such as Pepsi and Mountain Dew. Pepsi and Mountain Dew are both billion-dollar brands for the company. Pepsi also has billion-dollar snack brands to complement its sodas under the "Fun For You" label such as Fritos, Doritos, and Lay's. Those snack lines also generate over $1 billion in revenue for Pepsi individually.

Uniquely positioned on two fronts
Pepsi is well-diversified because it has substantial business in both food and beverages. Its competitors The Coca-Cola Company(NYSE:KO)(NYSE:KO) and Dr Pepper Snapple Group (NYSE:DPS) lack this diversification, as they are more pure-play beverage companies. Plus, Pepsi gets to benefit from not only the uptick in healthier drinking habits by consumers, but also healthier eating habits. Once again, Coca-Cola and Dr Pepper Snapple lack this dual-front approach to capitalizing on healthier eating in addition to healthier drinking habits.

Although Pepsi has a great strategy to benefit from the trends in the food, snack, and beverage markets, does its valuation make it conducive for investment?

Valuation leaves more to be desired

 

P/E

Forward P/E

5-Yr. PEG

P/CF

Pepsi

20.1

18.2

2.7

15.2

Coca-Cola

22.6

18.9

3

17.1

Dr Pepper Snapple

17.8

16.1

2.3

12.9

Data Source: Yahoo Finance & Morningstar.

Interestingly, none of the companies offer a compelling valuation for investment. Dr Pepper Snapple looks the most attractive on a relative basis considering all of the valuation ratios explored here. Nonetheless, its P/E of 17.8 is still around the S&P 500's of 18. The companies' valuations are even more concentrated on a forward P/E basis and do not differ substantially.

All three also look quite expensive looking out five years and considering analysts' estimates; their five-year PEG ratios are all above one, with Dr Pepper Snapple having the lowest PEG at 2.3. A five-year PEG ratio less than or around 1 would be optimal for investment. All three are a little pricey on a cash flow basis as well, with Dr Pepper Snapple having the lowest P/CF multiple at around 13. Still, Pepsi and Coca-Cola are not far behind Dr Pepper Snapple's valuation with P/CF multiples of about 15 and 17, respectively.

Consider valuation and strategy
Although none of the three companies are sound buys on a valuation basis alone, I believe Pepsi offers the best strategy for maintaining and substantially growing its current valuation. Pepsi is poised for present market conditions and the future with its forays into healthy food, snack, and beverage products, all while maintaining its legacy and billion-dollar brands. Therefore, an investment in Pepsi is more aligned with the future of the food and beverage industry and offers more diversification than either Coca-Cola or Dr Pepper Snapple.

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Andrew Sebastian has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of 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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