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Stronger in snacks and foods than rival Coca-Cola, PepsiCo expects robust growth internationally, more acquisitions of sustenance businesses, and cost-cutting

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PepsiCo Inc.—52-week stock price

By Gene Marcial

In these times of economic make miserable, investors are constantly seeking safety in companies whose earnings are predictable and whose stock prices are relatively stable. That’s too high a bar for most companies to clear these days, but some of the few that meets the challenge is PepsiCo (PEP).

The Pepsi name is widely recognized worldwide as a leader in beverages and hasty repast foods. The company’s stable of market-leading products has helped supporting cushion earnings contempt the global recession. In fact, PepsiCo’sitting profession outside the U.S. is fueling much of its earnings pullulation these days.

"Any company that can be augmented earnings, even a little in this remarkably weak relating to housekeeping environment, should be prized," says Edwin Walczak, chief investment officer at Vontobel Asset Management, which owns shares. PepsiCo, he adds, be able to be regarded in the manner that a defensive stock in this tough environment.

PepsiCo’session stock hasn’familiarily been immune to the market meltdown, in spite of by the agency of what mode well its earnings are holding up—and rising. Walczak figures the body command earn $3.66 a share for 2008 and $3.76 in 2009, which are below consensus analysts’ estimates. The association earned $3.34 in 2007.

With the shares now trading at 52 either (prostrate from their 52-week high of 79 in succession Jan. 10), PepsiCo is selling at a price-earnings ratio that’s lower than its "normal" annual average p-e of 20-21. Based in continuance Walczak’s 2009 profit estimate, the stock is selling at a p-e of pure 14. For a company that has a "main franchise worldwide, that is a bargain," he says.

PepsiCo should subsist regarded by investors as a "food [snacks] company with a beverage component rather than the other progression around, as most investors do," says Eric Schoenstein, a principal at Jensen Investment Management, which owns shares. He notes that its food operations, such as Frito-Lay and Quaker, accounted for 36% of operating profits and 29% of complete sales, as long as the potion components, including Pepsi, Mountain Dew, and Tropicana, generated 28% of operating profits and 26% of sales. PepsiCo International, which includes both snacks and beverages, accounted as far as concerns 29% of integral profits and 40% of sales. In the third proper position, the international unit continued to perform well, and the outlook ahead remains robust, says Schoenstein.

The company’s snacks and cereals spell the difference between PepsiCo and Coca-Cola Co. (KO), which doesn’privately take a large food ingredient, says Schoenstein. And the company intends to expand the foods unit end acquisitions. PepsiCo has done a dexterous job expanding harvest lines in sodas, and in this wise can focus acquisitions put on stronger growth areas such as foods, he says. Meanwhile, the foods operations are growing at a faster pace than the beverage business, and should continue to do so in the years ahead, according to Schoenstein.

Although in that place are pockets of slowing growth in the fellowship’s international markets, "the business is holding up well," says analyst William Pecoriello of Morgan Stanley (MS), who rates PepsiCo overweight with a compensation target of 74. The brokerage firm’s internal analysis shows there is little correlation betwixt a country’s gross domestic outcome growth and growth rates of salty snacks, Pecoriello says. Frito Lay, for example, literary works "rock solid" in foreign markets as well as in the U.S. (Morgan Stanley has done investing. banking for PepsiCo).

With the economic slowdown, the company has announced a cost-cutting plan that includes a reduction of 3,300 workers, or nearly 2% of its total workforce, and the shutdown of six plants in order to save $1.2 billion over the next three years. The rise in commodity prices cut into the company’s top and bottom line results, prompting PepsiCo to lower its earnings forecasts. That, in turn, spurred analysts to trim their sales and earnings estimates.

Nonetheless, for long-term investors the stock is appealing, says analyst Tom Nikic of investment examination firm Value Line (VALU), in share because of PepsiCo’s earnings predictability and financial strength and its dividend yield of 3%. "With all things considered, we see a good risk-reward scenario" in the pedigree, says Nikic. He gives PepsiCo the highest rating attached Value Line’sitting safety scale.

Also bullish is analyst Esther Kwon of Standard & Poor’s, who rates the stock a buy based on the company’s "domestic and international growth opportunities, pricing power, and healthy cash-flow increase." In addition, she says, PepsiCo’s leading positions in its markets and its emphasis on health and wellness through its products "should continue to drive the top line." (S&P, like BusinessWeek, is a unit of The McGraw-Hill Companies (MHP.)

Slowing economies worldwide at hand difficulties towards companies of all stripes. The Pepsi challenge, of run after, is to be permanent to add fizz to its fundament line amid the downturn.

Unless otherwise noted, neither the sources cited in Gene Marcial’s Stock Picks nor their firms hold positions in the stocks under discussion. Similarly, they have no investment banking or other financial relationships with them.

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