PepsiCo's Stunning Growth

I often think that long-term shareholders in PepsiCo (NYSE:PEP) must be very glad that the company took steps to move into salty snacks and non-carbonated beverages many years ago. The Fool by Numbers published earlier today reflects the overall 12% sales growth at the company, but we'll dig into some of the granularity here.

This quarter's results once again show that the carbonated beverage business is a strong cash flow generator, but it's not a huge growth driver. In fact, sales declined slightly for the company's Pepsi and Diet Pepsi beverages. For growth, you have to look to the non-carbonated beverages, Frito Lay, and the international business, where there are strong volume and revenue increases. None of these businesses on the whole delivers the growth that Hansen Natural (NASDAQ:HANS) has seen with its unique array of natural sodas and other drinks, but the valuation for PepsiCo makes a lot more sense, and the growth story at PepsiCo is stronger than it is at rival Coca-Cola (NYSE:KO).

With the company's strong performance, it raised guidance to at least $2.95 per share, which represents a 10.9% improvement over last year's $2.66 performance. More importantly, the company is guiding for $6.2 billion in operating cash flow and capital expenditures of approximately $2.2 billion. Assuming the company meets guidance, free cash flow should come in at $4 billion, which I think is a safe assumption, but pretty much flat with last year's performance.

PepsiCo also plans to purchase $3 billion worth of stock for the entire fiscal year and has purchased $1.47 billion so far this year. I find the company reasonably valued, assuming 8% to 9% growth in free cash flow, which seems like a valid assumption given the earnings growth. Add in the 1.9% dividend yield and the $3 billion in repurchases, and there is a small margin of safety in that valuation -- but not a large enough one to drive a truck through. Still, for a company of PepsiCo's quality, such discounts don't come along often.

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Coca-Cola is an Inside Value selection.

At the time of publication, Nathan Parmelee had no financial interest in any of the companies mentioned. The Motley Fool has an ironclad disclosure policy.