If they aren't already, long-term investors should be digging up some solid defensive plays, like PepsiCo Inc. (NYSE: PEP).
Everyone is familiar with PepsiCo, one of the leading manufacturers and marketers of food and beverage products. And with a strong business model, steady bottom-line growth, and a healthy dividend, PepsiCo is one of those rare buy-and-hold investments.
Although its name is typically associated with soda, PepsiCo has developed a diversified product line that supports a steady revenue stream from more than just fizzy drinks. PepsiCo, through its Frito-Lay and Quaker Oats subsidiaries, is the name behind consumer-favorite brands like Doritos, Tropicana, Gatorade, SoBe Lifewater, Cracker Jack, Rice-A-Roni, and Grandma's Cookies.
Many investors already know that, though.
What you might not know is that PepsiCo's future earnings are based on much more than delicious snacks for U.S. consumers.
This global powerhouse is investing in two areas that will drive food company profits going forward: emerging markets growth and "good for you" products.
It has struck deals to develop both initiatives this year, and the efforts are paying off.
Increased emerging markets sales boosted PepsiCo's revenue from those countries 33% last quarter. Sales of healthy products are on pace this year to hit almost $15 billion, and the company hopes to double that by 2020.
When you combine its new business focuses with its existing profitable product lines, PepsiCo is strong enough to weather a global economic storm - exactly what our portfolios need to include right now.
So it's time to buy PepsiCo Inc. (**).
PepsiCo Inc. Knows Where to Find Profits
Purchase, NY-based PepsiCo, founded in 1898, has had a strong presence in the U.S. food and beverage market for decades. Now it's working on replicating that brand loyalty in developing economies.
Pepsi announced last year that it was going to invest $2.5 billion in China - one if its highest growth markets - to expand its local capacity. It has massive plans for new manufacturing facilities, research and development centers, and brand-building programs.
The increased investment has already helped sales. In the third quarter, PepsiCo reported snacks volume grew in eight of its top 10 international markets, with snacks volume in Asia, the Middle East and Africa up 16% from the year before. China's snacks volume was up 31%, India up 26%, and Turkey 22%.
PepsiCo, recognizing the growing global focus on nutrition, also is starting a healthy-foods initiative.
It's expanding its product range to include more juice, dairy, and grain products, and expects healthier selections to make up about 30% of its portfolio in 10 years. Right now about 22% of PepsiCo products are considered "good for you."
It's already making strides in health with some global dealmaking. PepsiCo in September became the No. 1 juice and dairy company in Russia when it completed its $3.8 billion purchase of Wimm-Bill-Dann. And it has many more healthy products in the pipeline.
PepsiCo is reportedly working with a German company on a new yogurt product for the United States, will introduce iron-fortified snacks in India, is developing a new fruit beverage for Latin American markets, and is trying to identify nutrient-dense staple crops in sub-Saharan Africa to locally produce snacks.
PepsiCo's profits also will get a bump from continued food inflation. Global food prices are expected to increase 4% next year, and could climb even higher on supply squeezes. Costlier food prompted the company to raise product prices, which helped boost last quarter revenue by 13%.
Indra Nooyi, PepsiCo chief executive officer, said the pricing adjustments ,as well as increased consumer demand, led to well-balanced top-line and bottom-line growth last quarter.
The company reported revenue of $64.5 billion in the last trailing 12 months and gross profits of $31.2 billion. PepsiCo has been steadily increasing earnings for five straight quarters, with an average 1.7% increase in net income and 26.2% revenue growth. Revenue in the third quarter ended Sept. 30 rose 13.3% to $17.6 billion.
Pepsi has a market capitalization of about $100 billion, and an enterprise value of more than $121 billion once net debt and cash levels are considered. The company's 3.2% dividend yield makes it one of the higher yielding defensive megacaps.
Analysts give it an average price target of $70.17, a 9.9% premium to Friday's $63.85 closing price.
PepsiCo Inc. is a strong defensive play with steady and stable growth and dividend yield. It provides investors with a place to park low-risk capital.
The stock has had a tight trading range in the last year. It is extremely liquid and has a liquid options market.
Let's buy our exposure while the market is weak overall, but use the market to help average into this one. If you want to invest 3% of your low-risk portfolio, let's buy 2% at market now.
For the last third, let's put in a limit order at 5% below your first fill.
Pepsi also makes a great covered-call vehicle. The stock is not going to run away from us if we cap our near-term upside, and if it did, we can always repurchase it on weakness.
(**) Special Note of Disclosure: Jack Barnes has no interest in PepsiCo Inc. (NYSE: PEP).
Barnes launched his own shop, RIA, in 2003, just as the second Gulf War was breaking out. In early 2006, after logging a one-year return of nearly 83%, Forbes named Barnes the top stock picker in its "Armchair Investors Who Beat the Pros" competition. His two audited hedge funds generated double-digit returns in 2008.
Barnes retired to the beach in the summer of 2009, and continues to write from there. He's now the author of the popular blog, "Confessions of a Macro Contrarian," and his "Buy, Sell or Hold" column appears in Money Morning twice a week. In his BSH column last week, Barnes analyzed EOG Resources Inc. (NYSE: EOG).
News and Related Story Links:
- PepsiCo Inc.:
3rd Quarter Earnings Press Release - CNBC :
I Can't Believe It's Pepsi - Forbes:
Pepsi Bubblin' Up To $71 With Tasty Push From Frito-Lay - Reuters:
PepsiCo lineup to look healthier in 10 years: CEO - Money Morning News Archive:
Previous "Buy, SellorHold" Features. - JackBarnes.com:
Confessions of a Macro Contrarian.