Pepsi () has been a darling of the economic recovery. Shares of Pepsi stock have marched steadily higher since bottoming in March — a sign that operating conditions for a global consumer products company are better than most expected.
But will the trend continue?
Based on today’s report that the company will take its beverage business out of the Super Bowl XLIV advertising pool, there might be cause for concern. Walking away from the biggest marketing event of the year is risky no matter the reasons.
After taking the big step of acquiring Pepsi Bottling () earlier this year, the company now embarks upon a path of uncharted territory. Will it work?
I might be more concerned if the move was due to economic conditions instead of a change in strategy, but his might be a bold step that keeps the company ahead of the competition.
Here are five reasons to buy Pepsi.
Reason #1 – Valuation Is Cheap
At $60 per share, Pepsi stock trades for just over 16 times the current estimate of $3.71 per share earnings in 2009. With the company expected to generate double-digit earnings in 2010, shares of PEP are cheap. At the beginning of a new business cycle, earnings estimates tend to be too low. I expect estimates for Pepsi to rise in coming months. In addition, an expansion of that earnings multiple is likely in 2010. Pepsi is a cheap stock in my opinion.
Reason #2 – Pepsi Is Willing to Take Risk
The biggest loser of the past two years of the economic and financial crisis is innovation. Risk-taking has taken a back seat to conservative management. That means spending less and battening down the hatches. Is that any way to grow a company? No. Capitalism thrives on risk-taking. The move by Pepsi to skip Super Bowl XLIV is the kind of risk-taking that tends to be rewarded in our market-based system. If you want growth and stock appreciation, you need to take risk, and Pepsi is doing that.
Reason #3 – Pepsi Will Profit From Global Growth
Economies across the globe are recovering nicely. In fact, some are doing better than what we’re seeing in the U.S. That bodes well for Pepsi who is focused on global markets. Its CEO is of Indian descent and understands how to do business overseas. If you want oversized growth, you need to do business across borders. Pepsi is doing that and doing it well. That trend will continue as long as global economies continue to expand. This is a big opportunity for Pepsi, and they are exploiting it as they should.
Reason #4 – Expansion During the Recession
Most companies contract during an economic recession. The ones that do best in the next growth cycle are the ones that grow their business while others struggle to expand. Pepsi’s move to buy Pepsi Bottling Group was a bold stroke by the company. The purchase is expected to be accretive to earnings in the immediate term. Before the recession began at the end of 2007, Pepsi Bottling traded for more than $40 per share. Buying for about that same price nearly two years later is what I would call opportunistic buying. In 2007 Pepsi may have been forced to pay $60 or more to get this deal done. This discount bodes well for current Pepsi shareholders.
Reason #5 – Pepsi Pays a Healthy Dividend
In this day and age, it makes sense to play it safe with your investments. That means buying stocks with strong cash flows that are partially distributed to shareholders in the form of a dividend. Pepsi fits this description well. The company pays a healthy 3% dividend. Most importantly, strong earnings will likely keep the dividend intact at that level even as the stock appreciates in value. Owning growth with a dividend then is the best of both worlds. This added bit of security makes Pepsi all the more attractive.
