Soft drink giants The Coca-Cola Company KO, PepsiCo, Inc. PEP and Dr Pepper Snapple Group, Inc. DPS did well in the first quarter of 2016 and look well poised for the upcoming second quarter. Despite significant currency headwinds, rising volatility in the global markets and declining demand for calorie-loaded sodas, the outperformance was driven by aggressive marketing initiatives, innovative efforts, cost containment and productivity improvements. The shares of these three forerunners witnessed a decent run.
Among these large soda companies, Pepsi might be an interesting investment option right now.
With a market cap of $147.3 billion, the Purchase, NY-based company markets hundreds of brands in more than 200 countries, enjoying a diverse portfolio, both geographically and product wise.
Why Pepsi Is a Good Choice
Good Rank and Solid Growth Score: Pepsi carries a Zacks Rank #2 (Buy) and a favorable growth style score of ‘B.’ Back-tested results show that only stocks with a Growth Style Score of A or B, when combined with a Zacks Rank #1 (Strong Buy) or 2, offer the best upside potential.
Rising Estimates and Share Price: Pepsi’s shares have had a good run this year, gaining around 5% year-to-date. Over the past 90 days, full-year 2016 earnings have moved north by 1.5% while that for 2017 has increased 1%.
Solid Snacks Business: Pepsi has the competitive advantage of selling both snacks and beverages, which are complementary food categories. Salty snacks and refreshment beverages have extremely high co-purchase incidence which is more than any other commonly purchased items. The complementary portfolio results in cost leverage, capability sharing, cross-category promotions and other commercial benefits.
Pepsi holds the number one position in global snacks with popular brands like Doritos, Cheetos and Lay’s. Just over half of Pepsi's sales come from snacks, while the remainder is contributed by beverages. Pepsi’s strong and growing snacks business has largely offset its sluggish beverages business in many past quarters. The Frito-Lay North American snacks business has delivered solid performance consistently over the last three years.
Aggressive Marketing; Significant Innovation: Since 2013, the company has significantly stepped up its advertising & marketing (A&M) and R&D investments to strengthen its brands and accelerate product innovation. The company is boosting its in-store merchandising capabilities, effectiveness of go-to-market systems in the international markets and identifying new productivity projects.
To cater to changing consumer preference, it’s working on expanding the range of its nutritious products; along with testing cola product variations using evolutionary natural sweeteners and also has broadened its beverage portfolio to include more non-carbonated beverages to lessen dependence on colas. Pepsi also plans to increase out-of-home availability of its healthier snacks and beverages and invests aggressively in new packaging to shift consumers to more profitable purchases.
The company’s A&M and R&D plans have been paying off. These initiatives helped the company to deliver an overall healthy performance in the three years from 2013 to 2015 — either achieving or exceeding most of its financial goals in those years — despite the tough macroeconomic environment. The strong performance continued in the first quarter of 2016 as well.
Strong Results, Solid Outlook: Pepsi has been doing well since 2014 on the back of significant innovation, ongoing revenue management strategies, improved productivity and better market execution. Importantly, amid a volatile macroeconomic environment, slowing growth rate and significant currency headwinds, Pepsi has done well in the emerging markets. Moreover, Pepsi has been seeing higher volumes and profits in the North American segments due to improving economy, better industry pricing dynamics and positive innovation consistently.
We believe that Pepsi’ new product line-up, aggressive marketing efforts, productivity improvement and cost-saving initiatives should drive profits in future quarters as well.
Conclusion
Everything is not looking hopeful for Pepsi though. Rising volatility in global markets, increasing currency headwinds and persistent sluggishness in CSD volumes may dampen growth, going forward. Nevertheless, the company has been countering these headwinds successfully through cost savings, productivity improvements and innovation.
Stock to Consider
Another attractive beverage company is Primo Water Corporation PRMW which sports a Zacks Rank #1 (Strong Buy).
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report >>
Want the latest recommendations from Zacks Investment Research? Today, you can download 7 Best Stocks for the Next 30 Days. Click to get this free report
Be the first to comment