PepsiCo (PEP): Portfolio 'pop'

Posted Sep 24th 2007 2:57PM by Steven Halpern
Filed under: Rumors, PepsiCo (PEP), China, Newsletters, Bargain Stocks, Eastern Europe, Stocks to Buy

"Things are going well at PepsiCo (NYSE: PEP), in fact, very well," says Tom Slee, a contributing analyst with Internet Wealth Builder who sees strong operating results, defensive characteristics for a volatile market, and an increasing focus on healthier products.

Second-quarter earnings, he notes, jumped a 17%, to 94c a share, up from 80c in 2006. Analysts were looking for 89c at most. According to Slee, "There was progress across the board."

Indeed, he observes, "All the operating divisions beat expectations and as a result Pepsi has increased 2007 earnings guidance to at least $3.35 a share. We should see $3.80 or more in 2008."

The advisor says, "This is an excellent stock to own in these volatile markets." He continues, "Everything points to continued earnings and cash flow growth in the U.S. soft drinks industry."

He points out that history shows that people keep buying these beverages even during economic downturns. So, he says, Pepsi is likely to be unaffected by any fallout from the housing slump."

At the same time, he contends, the industry is benefiting from a growing demand for non-alcoholic products and bottled water. "It's also interesting to note that Pepsi's campaign for healthier snacks, once derided as a poor joke by some skeptics, is paying dividends," suggests Slee.

He explains, "Consumers still like their snacks but are now turning to Pepsi products, such as Baked Lay's potato chips, Diet Pepsi, and Tropicana orange juice, that are labeled as meeting the company's limits on sodium and other additives."

He adds, "Another thing worth noting is that the rumored merger with Nestlé, the giant Swiss food conglomerate, will not go away. It would make a lot of sense. Pepsi still relies on the U.S. for 37% of its revenues while the future lies with emerging markets where Nestlé is well positioned."

One report, he notes, suggested that the Swiss company is on a health food kick and therefore reluctant to make a deal with Pepsi because of its carbonated drinks image. That, he says, may explain all this new focus on Diet Pepsi and bottled water.

In any event, Slee observes, "Pepsi is not wasting time waiting for an offer. The company plans to invest $1.3 billion in China over the next few years. Another $1 billion is earmarked for Eastern Europe." He rates the stock a buy with a target of $75.

Each day, Steven Halpern's TheStockAdvisors.com features the latest stock picks and investment ideas from the nation's leading financial newsletter advisors.

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