The soda business in the United States is in a downward spiral as consumers become more health conscious. Nevertheless, even in these perilous times for soda companies, PepsiCo (NASDAQ:PEP) managed a year over year return of 27%, while its major rival Coca-Cola (NYSE:KO) provided a return of 11% to its shareholders.
The most important question right now is will PepsiCo be able to continue with its stellar performance in the future, or will its performance fizzle out as the soda business continues to decline in the United States?
Third quarter results
PepsiCo recently posted profits that were in excess of its earnings estimates. Expected EPS as surveyed by Bloomberg was $1.17, while the actual EPS came out to be $1.23. This high profit is mainly attributed to the growth in the food sector.
Even though the volume in the drinks business in the Americas and Europe decreased by 4% and 1%, respectively, it increased by 7% in Middle East, Asia, and Africa. The volume in food business was up by 3% in American food, 3% in Latin America, and 4% in Europe , the Middle East, and Asia. The overall sales volume in Pepsi's food business increased by 3%, while the beverage volume increased only by 1%.
The management of PepsiCo believes that the company is on track to achieve 7% core EPS growth from the previous year.
India, with its growing middle class and it's increasingly higher disposable income, has been a huge market for PepsiCo. The company generates more than $159 million in annual sales from the country and sees India as a country with massive potential, which is why the company plans to invest $5.5 billion in India by 2020. The investment will be aimed at expanding the product range, increasing production capacity, and improving its sales and distribution network. Sanjeev Chadha, CEO of PepsiCo Asia, Middle East and Africa indicated that the company is aggressively expanding their outreach in India, especially in the rural markets which have been a "key growth driver" for them over the past three years.
Share repurchase program
In January 2014, the company is expected to return $6.4 billion to its shareholders, $3.4 billion in dividends and $3.0 billion in the form of share repurchases. This will reduce the number of outstanding shares in the market, which indicates that the company has a fair amount of excess cash.. This also implies that the management thinks that Pepsi's shares are undervalued right now.
PepsiCo has a higher P/E ratio than the industry average of 18.82, indicating that higher future growth is expected from the company. PepsiCo also has the highest book value per share, reinforcing the expectations of future growth.
The company has the highest cash available per share, which signifies the availability of cash for the company's share repurchase program. In terms of profitability, PepsiCo has the highest return on equity as compared to its competitors. The company has the lowest beta coefficient, indicating that it is more stable than its competitors.
Rivals: Coca-Cola & Dr Pepper Snapple
The Coca-Cola Company, like PepsiCo, has a large geographical reach. However, the company does not hold as much of a well-diversified product portfolio as PepsiCo does. To make the most out of the emerging markets, Coca-Cola has been investing heavily in Asia to expand its business while innovating its products to better fit the local preferences. The company is set to invest $5 billion in India and over $4 billion in China in the coming years. Following the trend in the United States, people in China are also getting increasingly health-conscious. For this reason, Coca-Cola is open to deals with local manufactures to cater local styled healthier drinks and herbal teas.
Year over year capital appreciation has been 11%, which makes Coca-Cola a valuable stock. With the company undertaking new investments in emerging markets, Coke will continue to provide PepsiCo with tough competition.
Dr Pepper Snapple Group (NYSE:KDP) does not have as huge a geographical presence as its competitors, and therefore has been exposed to the bumps in the United States soda market. This is why the company recently lowered its revenue guidance, envisioning flat net sales.
However, the company's products include a number of renowned Non-CSDs (carbonated soft drinks), which are expected to do well in the future. But company's limited market and no new investment undertaking casts a shadow of doubt over its future when compared to its competitors.
According to FoodPolitics.com, it is anticipated that the profitability of the entire beverage industry will increase from 3.5% in 2010 to about 4.5% in 2015. However, this will be driven mainly by increased consumption of functional beverages and bottled water, and not by soda. There has been a fundamental shift in the consumer preferences as more people move away from CSDs and towards healthier and natural substitutes. Even the diet category of sodas has been under pressure as people are demanding natural sweeteners instead of artificial ones.
PepsiCo continues to have a strong global presence and a diversified product portfolio. PepsiCo's food business is growing and showing huge potential in Middle Eastern and Asian markets. Even though the CSDs business is on the decline in the US and Europe, it is still on the rise in Middle East and Asia. PepsiCo is committed to investing in Asian markets, which are showing a lot of potential for the soft drinks giants and promising future growth.
Financially, the company is showing a lot of promise of future growth as the new investments start paying off. PepsiCo's management firmly believes in rewarding its shareholders, which is indicated by their share repurchase program. Pepsi's food segment, which outperformed its earnings expectations, continues to show a lot of potential. Considering all of this, PepsiCo is an excellent choice of investment as compared to its competition, followed closely by Coca-Cola, while Dr Pepper Snapple lags behind.
Zahid Waheed has no position in any stocks mentioned. The Motley Fool recommends Coca-Cola and PepsiCo. The Motley Fool owns shares of Coca-Cola and PepsiCo. 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.