PepsiCo, Inc. PEP is fast nearing the magic closing figure of $100. The stock closed at $99.15 on Aug 6, after touching a mid-day high of $100.61. The big question is whether the food and beverage giant can cross the magic number.
Pepsi enjoys robust fundamentals — strong brand portfolio, vast product and geographic diversity and solid cash flow generation. Moreover, it boasts the competitive advantage of selling both snacks and beverages which are complementary food categories.
Despite the ongoing global macro challenges, Pepsi did well in 2014 and so far in 2015 backed by the strong snacks business, increased pricing, better execution, cost savings/productivity gains and brand building investments.
Since 2013, the company has significantly stepped up advertising & marketing (A&M) and R&D investments to strengthen its brands and accelerate product innovations. The company is boosting in-store merchandising capabilities, effectiveness of go-to-market systems in the international markets and identifying new productivity projects.
The company has increased investments in social and digital marketing as well as advertising efficiency by focusing more on consumer-facing activity. Over the past three years, Pepsi has introduced several products that have achieved or are about to achieve more than $100 million each in annual retail sales.
The company’s A&M plans and innovation efforts are paying off. These initiatives helped the company to deliver an overall healthy performance in 2013 and 2014 — either achieving or exceeding most of its financial goals for the year — despite tough macroeconomic environment. The momentum continued in the first half of 2015 with the company performing well in both the quarters.
Pepsi’s share price has increased a massive 53% since 2013. Moreover, the company delivered positive sales and earnings surprises for six straight quarters. It looks well poised for the second half as well.
Moreover, the company has both an Earnings ESP of +0.79% and a Zacks Rank #3 (Hold) which largely increases its chances of beating earnings expectations in the third quarter of 2015. We believe that consumer focused innovation, brand building investments, better marketplace execution, pricing actions and productivity gains should drive Pepsi’s results in the second half, despite weakening international currencies and economic slowdown in many countries.
With a bullish second-half outlook, crossing the $100 per share mark should be a piece of cake for Pepsi.
Stocks to Consider
Better ranked food stocks include Mondelez International, Inc. MDLZ, Cal-Maine Foods, Inc. CALM, and Post Holdings, Inc. POST. All the three stocks carry a Zacks Rank #1 (Strong Buy).
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