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Rising Star Buy: PepsiCo

By Alyce Lomax – Updated Apr 6, 2017 at 11:26PM

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The sodas n' snacks specialist gives this portfolio positive pep.

This article is part of our Rising Star Portfolios series.

PepsiCo's (NYSE: PEP) quarterly results and outlook cast a pall on the stock last week. And I don't mind at all.

Given my Rising Star portfolio's focus on socially responsible investing for the long term, a little temporary bearishness on Pepsi merely offers me a reasonable price for this high-quality household name.

The business
In case you hadn't heard, Pepsi provides beverages and snacks to consumers. Brands include not only the ubiquitous Pepsi, but also Frito-Lay, Quaker Oats, SunChips, Doritos, Tostitos, Ruffles, Tropicana, and Gatorade, to name just a few. By peddling both beverages and snacks, Pepsi provides its product lines with a bit more diversification than rivals like Coca-Cola (NYSE: KO), Dr Pepper Snapple (NYSE: DPS), and Hansen (Nasdaq: HANS), all of which are beverage pure plays.

Although soda itself is hardly a healthy indulgence, consumers' increasing hunt for healthier options isn't lost on Pepsi. The company plans to capitalize off of healthy eating trends by launching "good for you" products in the coming years, a segment which it hopes to increase to a robust $30 billion in sales from just $10 billion now.

But when it comes to Pepsi's ability to evolve and innovate, that's just the tip of the iceberg.

Why I'm buying
Last year, PepsiCo CEO Indra Nooyi topped Fortune magazine's "50 Most Powerful Women in Business" list for the fifth consecutive year. At the helm of an old stalwart like Pepsi, Nooyi stands out by reviving the company with fresh ideas. For example, she recognizes the advantages of building a diversified, inclusive workforce, and she seeks to hire people who can add insight from many walks of life.

In an interview with Diversity magazine, Nooyi said, "We are a consumer business, and if you don't tap into all walks of society who are consumers to design products for those consumers, then you're really not doing the right thing by those consumers." Seeking to do right by your customers makes a terrific game plan for a great business.

Behind the scenes, Pepsi's units have other highly evolved business plans in the works, too. For example, its Frito-Lay division has been greening up big time, having converted one-third of its plants to "zero landfill" status in 2009. To get the rest of its facilities up to that same standard, it's pursuing a variety of novel strategies, including solar technology, water recovery systems, stack heat recovery, and biomass boilers.

Pepsi's also got plenty of international growth in the works, targeting areas like Russia and China. Nooyi recently told BusinessWeek magazine that emerging markets make great "learning labs," through which Pepsi can devise new products and services. It's a very good sign when a stalwart blue-chip like Pepsi wants to learn new tricks, instead of just resting on its brand's laurels.

And now, the risks
Granted, things aren't perfect for Pepsi right now. Like many other consumer-goods companies, Pepsi must now contend with skyrocketing costs for its products' ingredients. Starbucks (Nasdaq: SBUX), Tyson (NYSE: TSN), and Kraft (NYSE: KFT) have recently made headlines for the commodity inflation risks they now face. For these companies, Pepsi, and many others, passing those costs along to cash-strapped consumers seems both difficult and unwelcome.

In addition, Pepsi's planned move into more nutritious fare can't come too soon. As obesity reaches epidemic proportions in the U.S., more legislators have begun to talk about taxing "sinful," sugary, unhealthy snacks.

Last but not least, Pepsi perpetually faces its age-old arch-rival Coke, as well as newer rivals like Hansen and snack purveyors like Kraft.

My Foolish bottom line
Overall, I think Pepsi's a high-quality blue chip that's trying to do the right thing in many respects. Its diversity initiatives, green innovations, and healthier fare all make this company a "good-for-you" stock. Pepsi trades at 13 times forward earnings, a favorable comparison to the higher multiples attached to Coke and Hansen, which trade at 15 and 21 forward earnings, respectively. In addition, Pepsi also boasts a solid dividend yield of 3%.

Furthermore, given Pepsi's growth-oriented goals and solid leadership, I expect Pepsi will outdo today's expectations in the coming years. The ability to innovate with changing times and needs separates growth-oriented companies from failing dinosaurs, and Pepsi seems conscious of the need to evolve to compete.

Pepsi may seem like its stock is all fizzle now, but it's still got a lot of pep left in it for the future. Add in the positive vibes that have convinced me to add it to my Rising Stars portfolio, and I think we've got a winner.

This article is part of our Rising Star Portfolios series, where we give some of our most promising stock analysts cold, hard cash to manage on the Fool's behalf. We'd like you to track our performance and benefit from these real-money, real-time free stock picks. See all of our Rising Star analysts (and their portfolios).

Coca-Cola is a Motley Fool Inside Value recommendation. Hansen Natural is a Motley Fool Rule Breakers pick. Starbucks is a Motley Fool Stock Advisor recommendation. Coca-Cola and PepsiCo are Motley Fool Income Investor picks. Motley Fool Options has recommended a diagonal call position on PepsiCo. The Fool owns shares of Coca-Cola.

Alyce Lomax owns shares of Starbucks. 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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Stocks Mentioned

Kraft Foods Group, Inc. Stock Quote
Kraft Foods Group, Inc.
KRFT.DL
Coca-Cola Stock Quote
Coca-Cola
KO
$62.48 (-0.35%) $0.22
Dr Pepper Snapple Group, Inc. Stock Quote
Dr Pepper Snapple Group, Inc.
DPS
PepsiCo Inc. Stock Quote
PepsiCo Inc.
PEP
$182.59 (-0.71%) $-1.30
Tyson Foods Stock Quote
Tyson Foods
TSN
$66.45 (1.40%) $0.92
Starbucks Stock Quote
Starbucks
SBUX
$98.66 (%)
Monster Beverage Stock Quote
Monster Beverage
MNST
$99.79 (-2.05%) $-2.09

*Average returns of all recommendations since inception. Cost basis and return based on previous market day close.

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