Why PepsiCo (NYSE: PEP) Stock Is the Real No. 1

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Pepsi or Coke?

How many times have we been offered that choice at a restaurant? But deciding on a beverage with a meal is merely a matter of taste.

Pepsico
NYSE: PEP
Apr 17 11:16 AM
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Price: 85.22 | Ch: 0.45 (0.5%)

When viewing PepsiCo Inc. (NYSE: PEP) and Coca-Cola (NYSE: KO) as investments, we must take far more into consideration. And the winner of this "Pepsi Challenge" may surprise you.

After all, Coca-Cola is one of the 30 stocks in the Dow Jones Industrial Average. Certainly it's the better stock, no?

Actually, the answer really is no.

In terms of recent performance, the PEP stock price rose over 22%, while Coca-Cola stock has only risen 12%.

There's a good reason for that. PepsiCo has several competitive advantages over Coca-Cola.

The fact is, Pepsi stock is a quality investment, period.

PepsiCo (NYSE: PEP): The Beverage Business

The more astute of you know that PepsiCo is both a beverage company and a snack food company by virtue of its ownership of Frito-Lay.

That already upsets the comparison to Coca-Cola, which has no such division.

Pepsi is literally in a class by itself because it stands alone as a worldwide provider of both snacks and beverages.

And because the beverage business is the more challenging of the two, PepsiCo has a big advantage over Coca-Cola.

PepsiCo management says the soda business is slowing, and they're right. Ten years ago, carbonated beverages accounted for 50% of the North American beverage industry. Today that number sits at 40%. More and more people are quenching their thirst with either noncarbonated healthier drinks or energy drinks.

Sales have declined for the flagship drink, Pepsi Cola, which also brings in the most revenue for the company.

Overall, volumes have declined by 4%. But while people may be drinking less Pepsi, Mountain Dew, and other carbonated drinks, the PepsiCo still has strong noncarbonated brands such as Gatorade, Tropicana, Dole, Lipton, AMP, and Naked Juice.

To turn this trend back in its favor, Pepsi is increasing its noncarbonated brands marketing efforts and is looking to the laboratory for some fresh ideas...

For instance, one big area of research and development is in sweeteners. The drop in diet drinks sales has really come to the forefront lately, as the public has come to realize that the artificial sweeteners in diet sodas may actually be unhealthier for them than either sugar or corn syrup. PepsiCo is investing a lot of time and money into finding a more natural substitute that still be low in calories.

PepsiCo (NYSE: PEP) in the Snack Foods Business

Meanwhile, PEP generates half of its sales from the snack business. Its line of snack foods are household names such as Lay's, Doritos, Cheetos, Fritos, Ruffles, Rold Gold pretzels, Cracker Jacks, and Quaker Foods & Snacks, which Pepsi bought in 2001.

And unlike the flat soda business, snack food sales in the United States are growing. PepsiCo saw its revenues increase 7% and volumes increase 3% in the most recent quarter for the PepsiCo Americas Foods division (which includes Frito-Lay).

PepsiCo greatly leans toward being more involved in the snacks business and is the number one snacks company in the world while retaining its position as the number two soft-drink company.

It's a powerful one-two punch.

That's why I'm baffled that activist investor Nelson Peltz of Trian Fund Management is advocating the idea that PepsiCo purchase Mondelez International Inc. (Nasdaq: MDLZ) (the maker of Oreo cookies and other popular snacks and crackers) and spin off the beverage unit entirely.

Peltz believes that it will unlock value for shareholders. But why break apart a company that very nicely hedges one asset (snacks) versus another (beverages)? As we've seen, it's just that combination that makes the company so compelling.

Thus far, Chairman and Chief Executive Officer Indra Nooyi has fended off questions about the Peltz proposal. With PepsiCo showing strong growth in its snack business and Nooyi defending the beverage business by referring to it as a "pretty damn good business," it appears she is more than content to keep things moving forward as a single entity.

More Positives for Pepsi (NYSE: PEP) Stock

Another thing that makes Pepsi stock so attractive is that half of the company's revenues come from outside the United States.

PepsiCo sells beverages and snacks in nearly 200 countries, and they're proving very hungry for the company's products.

As reported in its most current quarterly filing, China's snack volume increased 15%, and beverage volume saw double-digit growth. PepsiCo is heavily investing in the Asian region, with China and India in its cross-hairs. Recently, PepsiCo announced plans for a massive $5.5 billion investment in India, with the expectation of more than doubling production in the region by 2020.

Investing in these emerging markets is a no-brainer. The per-capita consumption of PepsiCo products by residents in these countries is far lower than it is in North America. India, for example, has a population of 1.2 billion people, many of whom may have never been exposed to PepsiCo products in their lives. Management believes that in the very near future two-thirds of its revenues will come from such emerging markets.

When you combine Pepsi's strong prospects globally with its thriving snacks business and promising efforts to revive its beverage business, and you've got a stock with a ton of potential.

That's why I would be a confident BUYER of PepsiCo (NYSE: PEP) stock.

About the Author: David Mamos brings nearly 15 years of analytical experience to the table, with a background ranging from big-picture fundamental analysis to highly technical trading decisions. He began his career working as a financial advisor with Royal Alliance in 2001 and helped clients with portfolio management as well as buy-sell decisions before transitioning to the development, implementation, and execution of trading strategies for aggressive investors.

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