Will Pepsi Stay a Refreshing Investment?

Source: http://www.flickr.com/photos/mmarshall-photography/

Source: http://www.flickr.com/photos/mmarshall-photography/

PepsiCo (PEP) has been one of the better performing large-cap stocks year to date. So far the shares are up over 6 percent whereas the S&P 500 is up just 4 percent and Pepsi’s main competitor—Coca Cola—is actually down slightly for the year. PepsiCo reported an excellent first quarter—while revenues and gross profits were up only marginally, competitor Coke’s revenues and gross profits fell. Furthermore due to cost-cutting the company managed to grow its net income by over 10 percent, and its EPS by nearly 15 percent.

Despite this strong performance the company still trades with a price to earnings multiple of 20, which is below that of the S&P 500 and competitor Coke, both of which have P/E ratios of about 22. Pepsi also pays a healthy 3 percent dividend.

Pepsi shares are performing so well for a variety of reasons. The first is that investors have been flocking towards food stocks, and while Pepsi is best known for its soft drink division it has a large packaged food business: It owns brands such as Quaker and Frito Lay. There has been a lot of interest in packaged food companies because of the M&A activity we are seeing with Hillshire Brands (HSH). People often don’t realize that there is a lot of innovation and technology that goes into food production, as these companies need the expertise to produce large quantities of food efficiently. Being such a large company PepsiCo is not a take-over target, but the market is coming to realize the value of these companies’ technologies. This is a reason why the company’s shares are outperforming Coke’s, keeping in mind that Coke is exclusively a beverage business.

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