C = Catalyst for the Stock’s Movement

Do you have any Pepsi products in your home? Please take a moment to check. You don’t need to check? You’re certain there are no Pepsi products in your home? You’re still sitting in your chair? Wow…you’re pretty confident. However, there’s also a very good chance that you’re wrong. If you have any of the following items, then you do in fact have Pepsi products in your home: Pepsi, Gatorade, Aquafina, 7UP, Mountain Dew, Sierra Mist, Cap’n Crunch, Quaker Oats, Tropicana, Fritos, Santitas, Lays, Ruffles, Doritos, Tostitos, Cheetos. And that’s not even the whole list! As you can see, Pepsi not only dominates the snack category, but it doesn’t do too poorly in the beverage department either.

Going forward, Pepsi will add healthy options, but that doesn’t mean it will abandon current products. Whatever continues to sell well will continue to be sold, and most of the products listed above sell well. That last sentence had a little potential for a tongue twister, didn’t it?

As far as the whole Pepsi vs. The Cola-Cola Company (NYSE:KO) argument goes, an official announcement of a winner is well past due. Here it is: both are winners! Case closed. You can’t argue it any other way.

Getting back to Pepsi, it’s currently trading at 19 times earnings, which is right at the industry average. It’s trading at 15 times forward earnings. Margins are solid, ROE is 28.70 percent, and operating cash flow is superb at $8.48 billion.

Let’s take a look at some more important numbers prior to forming an opinion on this stock…

E = Equity to Debt Ratio Is Normal

The debt-to-equity ratio for Pepsi qualifies as normal, but it’s still a little on the high side. The balance sheet is in negative territory and could be improved. However, as stated earlier, cash flow is superb. Even levered free cash flow is very impressive at $6.80 billion.

T = Technicals on the Stock Chart Are Strong

Pepsi has outperformed Coca-Cola and Dr. Pepper Snapple Group (NYSE:DPS) for every timeframe listed below excluding a three-year timeframe. Since Pepsi and Coca-Cola tend to switch leadership roles in regards to stock performance through the years, it’s important to look at the dividend yield. You might think this would lead to an easy decision in relation to a better investment, but they both yield 2.90 percent. Once again, they’re both winners. Dr. Pepper yields 3.60 percent.

At $75.48, Pepsi is currently trading above all its averages.

E = Earnings Have Been Steady             

Earnings had been improving on annual basis for several years before a slight setback in 2012. The same can be said for revenue. In a macro sense, both the top and bottom lines have been heading in that direction.

When we look at the last quarter on a year-over-year basis, we see a decline in revenue and an improvement in earnings.

Now let’s take a look at the next page for the Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

T = Trends Support the Industry

Demand for soft drinks has weakened, while costs have increased. This presents a challenge, especially since passing those costs on to the consumer would be risky in this economic environment. That’s the bad news. The good news is that there is still a large segment of the population that will continue to consume soft drinks. They will also continue to consume snacks. We keep hearing about a trend toward healthy. Yes, there is a healthy trend that has been taking place for years, but we’re still an overweight country, which partially comes from eating the types of products Pepsi sells.

Here’s a quick example of the current trend in regards to healthy food and not-so-healthy food: Subway might have grown by leaps and bounds over the past two decades, but has it hurt McDonald’s Corp (NYSE:MCD) in a significant manner? If you’re not sure, go look at McDonald’s stock chart.

A final thought here is that Pepsi will soon be moving into the health food market. There are a lot of doubters about Pepsi’s potential in this arena, but Pepsi doesn’t fail often.

Conclusion

Pepsi has one of the most popular brand names around, strong fundamentals, a nice dividend yield, consistent growth, and a stranglehold on the snack food market. Pepsi will always receive an OUTPERFORM rating here. The only possible scenario where this wouldn’t be the case is a nuclear war.

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