Market pessimism hits snack king PepsiCo: PepsiCo appears financially healthy, despite trading at a two-year low

There is much more to PepsiCo (NYSE: PEP; Recent price: U.S.$39.37) than soft drinks. It is in fact the world's fourth largest food and beverage company. With PepsiCo's acquistion last year of Quaker Oats, the company that was once best known for marketing Pepsi and other 'junk food' has moved, into healthy foods as well: Gatorade, oatmeal and rice cakes.

This makes PepsiCo "the snack king" to a wide variety of junk food addicts or a health conscious consumers.

The PepsiCo shuffle

In May, PepsiCo introduced Mountain Dew Code Red, which is developing into one of the most successful soft drink launches in many years. In June, PepsiCo engineered an executive shuffle that combines the Pepsi-Cola, Quaker, Tropicana, and Gatorade businesses into a new North American food and beverage division. This effectively wraps up the integration process.

While the stock climbed several months following the Quaker Oats deal, of late PepsiCo shares have taken a hit. The investor pessimism that depressed other stocks has caught up with Pepsico as well. Its announcement that second-quarter revenue and volume growth turned out to be below expectations did not help either. (The fact that there was a 14% increase in earnings was overlooked by investors.) As a result, the stock is now (mid-September) trading at a 52-week low of U.S.$39.37.

Pepsico appears to be in sound financial health, despite trading at a two-year low. Current management and balance sheet indicate that the company is well positioned to generate long-term revenue and earnings growth.

Because of its higher price earnings ratio, PepsiCo carries a slightly higher risk compared to other stocks in its sector. However, considering the ever-increasing consumption of snack foods in North America, PepsiCo can be expected to deliver superior returns over the long term.

PepsiCo

NYSE Symbol                    PEP

Recent price                $39.37
P/E                          25.70
Market Cap.             $71.15 Bil
Earnings/Share               $1.56
Shares Outstanding       1.772 Bil
Dividend/Share               $0.60
Current Dividend Yield       1.50%

Note: All prices mentioned are in U.S. dollars