Is There Still Fizz In Pepsi?

Its been a flat year for the beverage maker

Although it’s been an effervescent year at Pepsico (NYSE: PEP), the last 12 months haven’t added much pop to the soft drink maker’s stock. Even with spokesman Shaquille O’Neal playing pivot in the company’s televised ads, lagging revenues in Pepsi’s fast food operations, including KFC, Pizza Hut and Taco Bell, contributed to a 19% drop-off in earnings per share. Chief Executive Officer Roger Enrico constantly chafe at comparisons between his soft drink maker and Coca Cola (NYSE: KO), and for good reason. Including stock price appreciation and dividends, Coke rang up a 46.7% total return for shareholders over the last year, compared with 10.5% for Pepsi.

Not that Pepsi has been a total washout for investors since BE included the company in its September 1996 Stockpile. At press time, shares had appreciated to $38.50, an 8% gain from $35.63 when we recommended the stock last year. (BE Publisher Earl G. Graves owns a Washington, D.C., Pepsi distributorship.)

Pepsi’s solution is to shed the restaurant business through a spin-off, a move some Wall Street analysts think will add focus to company operations and return business to a 15% earnings per share growth rate. In another move, Pepsi has narrowed its sights overseas, including backing out of its South Africa venture. Speculation also runs high that Pepsi might seek to broaden its soft drink franchise by acquiring a Gatorade or Snapple in the near future. Heartened by that outlook, 16 of the 22 brokerage firm analysts covering the stock rated it a buy or strong buy, according to Zacks Investment Research. Pepsi’s projected earnings growth rate for the next five years stands at a shade above 14%, a bit behind the 19.2% foreseen for the beverage industry, but more than twice the 7.1% for the S&P 500. That bodes well for current shareholders. You might think twice, however, about adding to your stake in the company: Pepsi now carries a price-to-earnings ratio of 26.5 compared with 20 for the S&P 500.

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