Few companies, are as iconic in America as soda conglomerate PepsiCo (PEP +0.76%). Yet, while Pepsi is definitely well known, it's more commonly recognized for its soda wars with Coca-Cola (KO +0.78%) and Dr Pepper Snapple (DPS +0.00%), than for being a "hot stock."
Investors are always looking for the next big thing. It may surprise you to know that the next big thing isn't always a tech stock, or a biotech start-up. Sometimes the best growth opportunity is lying right in front of your face.
What you may not know about PepsiCo
Believe it or not, well established businesses can grow faster than small and trendy one's. The key is finding businesses that have a unique competitive advantage, that all-important moat that Warren Buffett is always talking about.
Here are three things that give PepsiCo a unique moat, some of which you may not be familiar with.
Pepsi has over 100 years of sugary success
Did you know PepsiCo's flagship brand, Pepsi, was invented by 1890? Like arch-rival Coca-Cola, this drink was first invented by a pharmacist, Caleb Bradham, to help settle stomachs.
The medicinal effects were short-lived, but the great taste wasn't, and Pepsi has been a mainstay in the U.S. ever since. While the company PepsiCo has branched out with multiple other brands, the brand of Pepsi is among the most recognized in the world.
Why does this matter to investors? Well, that brand habituation, or "brand moat," can lead to remarkably steady cash flows. Think about it, you may very well go into a super market knowing which brand you're going to purchase, even before you hit the soda aisle.
That branding has helped boring, old, Pepsi gain 20 points already this year. The stock has brought investors a double over the past decade, not including dividends, with substantially less risk than the market average.
The stability of PepsiCo's cash flows, helped the soda maker raise its dividend six times from 2008-2012, through the darkest days of the Great Recession.
PepsiCo, is much more than just Pepsi
While the brand recognition of Pepsi certainly is a benefit to PepsiCo, the company is much more diversified than its competitors. PepsiCo actually garners the majority of its revenues from its food businesses.
Currently 61% of PepsiCo revenues come from Quaker, Frito-Lay, and other food brands. The additional 39% comes from Pepsi, Gatorade, Tropicana, and others.
Contrast that with Coca-Cola, which brings in 28% of its revenues from its namesake brand, but all of its revenues from beverages, and it's easy to choose Pepsi on diversification alone. An even greater disparity, however, is Dr Pepper Snapple, which derives 75% of its revenues from carbonated drinks. Dr Pepper Snapple is completely relying on a slowing business, carbonated beverages, for growth.
Pepsi is well positioned for a changing consumer
In recent years, we've seen a shift among consumers away from carbonated beverages. U.S. sales of sugary soda have been slowing, and studies have compared the health risks of diet soda to those of serious illegal drugs.
It seems like every day the position on carbonated beverages, especially diet soda, gets worse. Investors would be wise to appreciate, just how much carbonated drink dependence can hamper these firms.
Coca-Cola currently earns 12% of its business from bottled water, and that figure is growing, so they should be able to weather the health storm. However, Dr. Pepper Snapple is playing catch up, and PepsiCo is better positioned than all three.
With the recent FDA ban of trans fats, you should prepare for a more informed consumer. Pepsi's CEO, Indra Nooyi, has been anticipating a health conscience consumer for years. She has made healthy eating, sustainability, and social consciousness a priority.
Her vision makes PepsiCo a safer pick, simply put.
Foolish conclusion: Think like an owner
Foolish investors should challenge the conventional methods of stock picking. The financial media tells us to focus on technical analysis, and short-term moves, rather than details about underlying businesses.
By thinking like an owner, you may be more inclined to learn about PepsiCo's industry, the history of its brand, and the diversity of its business lines. That's what we did today, and it looks like this stock is much hotter than we imagined.
