Can Pepsi (PEP) Follow Coca-Cola's (KO) Lead?

This week, Coca-Cola's (KO: Charts, News) stronger than expected earnings has caused investors to think twice about its often overlooked peer, Pepsico (PEP: Charts, News) - the producer of Pepsi, Mountain Dew, Gatorade, Doritos, Ruffles, Quaker, Aunt Jemina and other well-known global brands.

Shares of Pepsi have remained weak over the past year, due to a weak earnings report in the fourth quarter of 2011. Since then, Pepsi announced a plan to layoff 8,700 employees in a bid to reduce $1.5 billion in costs by 2014. Pepsi stock was largely ignored during the subsequent market wide rally that pushed many major stocks, including Coca-Cola, to 52-week highs and beyond. Now, as volatility returns to the market, investors who are looking to "sell in May and go away" have expressed renewed interest in Pepsi, which can be considered a slow moving, defensive income stock that can stay afloat in uncertain times. Daily Chart
Like Coca-Cola, Pepsi's stable of junk food products is considered recession-proof. Both stocks have held up well in times of mass market panic and financial crises. Neither consumer sentiment nor discretionary spending power has shown much impact on earnings, making them safer than restaurant or supermarket stocks. Pepsi is considered a solid dividend stock by income investors. Its current yield of 3.1% outpaces most of its industry peers, including Coca-Cola's 2.75% dividend. Pepsi has raised its quarterly dividend annually over the past decade, rising from 14 cents in 2001 to 51.5 cents last quarter. On a fundamental basis, Pepsi's P/E of 16.4 is significantly cheaper than Coca-Cola's ratio of 19.7. This has led some analysts to speculate that since the two companies are fundamentally similar, Pepsi's share price could catch up to Coca-Cola's. However, others argue that Pepsi is in a far weaker position globally than Coca-Cola. Pepsi has consistently been regarded as "the other cola" by consumers and investors alike. CEO Indra Nooyi has struggled to appease investors who have grown tired of the stagnant stock price during her six years at the helm - a period when Coca-Cola shares have nearly doubled. In 2010, Pepsi lost its second place market share in the cola market to Coca-Cola's Diet Coke. As Pepsi's market share slid, Nooyi attempted to shift the company's focus away from its flagship sugary beverages and salty snacks, and towards healthier snack foods - a polarizing move that has failed to yield any noticeable results. Nooyi's supporters point out that her strategy is "aligned with the times", at a time when 34% of Americans are classified as obese. A progressive effort to evolve the company into one focused on healthy food products could help Pepsi avoid the fate of junk food icon Twinkies, which went bankrupt in January. As part of this initiative, Pepsi introduced Pepsi NEXT earlier this year, a mid-calorie cola containing 60% less sugar than the original Pepsi-Cola. Despite her best intentions, investors have accused Nooyi of neglecting the company's lagging North American soft drink business, a former stronghold that has been irreparably breached by Coca-Cola's aggressive growth. Nooyi was also harshly criticized for not advertising during the Super Bowl and other major sporting events. In February, the company warned that its profit would slide by 5% this year. Last month, Nooyi appointed John Compton, the head of the company's Frito-Lay business in the Americas, as company president. This has assuaged some investors, who believe Compton's long history of promoting Pepsi's flagship snack food brands could turn a page for the lagging company. Shares of Pepsi currently trade with a 5-year PEG ratio of 2.56, signifying sluggish growth ahead. However, with a low beta of 0.51, it can be considered a haven in a potentially volatile summer. Other News About PEP PepsiCo's new Chinese alliance will not change our business strategy: Coke CEO Coca-Cola and Pepsi race to spread across China. Jim Wilkinson Joins PepsiCo as Executive Vice President, Communications Pepsi adds a highly influential member to its executive team. Other Stocks in the News Apple iPad Share To Drop Below 50% In 2013? Intel & Microsoft Think So Intel and Microsoft predict Apple's demise in 2013. Berkshire Shareholder Not Worried About Buffett News Buffett is diagnosed with cancer; how will investors respond? Copyright 2012 by, Inc. InvestorGuide has no control over the sites we link to, is not affiliated with these sites, and cannot take responsibility for their quality or suitability. The news, analysis, commentary and profile information is not meant to be comprehensive, and the data provided is not guaranteed to be accurate. WebFinance Inc., the publisher of this newsletter, is not a registered investment advisor or a broker/dealer. This is not a stock recommendation newsletter but rather a source for investment ideas, and we encourage you to fully research any company before considering investing. The opinions expressed herein are those of the author and do not necessarily represent the views of nor are they endorsed by WebFinance Inc. No employee of WebFinance has owned or currently owns any shares in the company described above. The above is neither an offer nor solicitation to buy or sell any securities. The trading of securities may not be suitable for all potential readers of this newsletter, and the purchase of stocks mentioned in this newsletter may result in the loss of some or all of any investment made. We recommend that you consult a stockbroker or financial advisor before buying or selling securities or making investment decisions. We are not responsible for claims made by advertisers and sponsors. Anyone who makes decisions based on what they read here does so at their own risk and cannot hold WebFinance Inc. (DBA, Inc.) or its employees responsible.

Published on Apr 19, 2012
By Leo Sun
Leo Sun
Leo Sun is a freelance finance writer and position trader. He focuses on a combination of value and momentum investing, with a strong interest in the trading philosophies of Warren Buffett and Peter Lynch. Leo also has experience writing articles to help small business owners acquire loans and manage their finances. He regularly contributes to the Stock of the Day analysis.

Copyrighted 2020. Content published with author's permission.

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