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3 Reasons Pepsi Stock (PEP) is a Great Buy for Investors Now

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There are some things that every individual is intrinsically capable of appreciating. Envision a hot, humid day on the sandy Jersey Shore, in the lush Amazon region of Colombia, or the dry, 5,000 year old Forbidden City in Beijing. To alleviate the blistering heat, someone pulls an ice-cold Pepsi out of their bag and takes a sip, immediately followed by a sigh of relief.

Soda Stocks

When looking for a soda to quench their portfolio’s thirst, many look first to Coca-Cola (KO - Free Report) as the main choice. However, Coke’s top rival Pepsi (PEP - Free Report) may actually be a better choice for investors right now.

Some are inclined to disagree, citing the more health conscious consumer or recent soda taxes, along with PEP’s narrow sales miss in Q1 as notable reasons for concern. But if we look beyond these headline issues, we see that PEP could actually be a very solid choice for investors in this market, especially considering the following key points.

The Experts Say Pepsi’s Future is Bright

Pepsi currently sits at a Zack Rank #2 (Buy). In Q1, Pepsi had a strong earnings report, beating the Zacks Consensus estimateof 81 cents by 9.9%. Although Pepsi did barely miss sales expectations, this was due largely in part to currency headwinds as well as their Venezuela deconsolidation. Pepsi delivered the results that they did in a volatile macroeconomic environment, which is continues to be the case today and makes it a stock still worth considering.

Consistency has been one of Pepsi’s strongest suits in recent years, either meeting or exceeding earnings expectations for the last four quarters. They average a surprise coefficient of about 6% above estimates. This solid track record in earnings should be considered a reason to remain confident in Pepsi, as it further supplements the idea that they will continue the trend.

PEPSICO INC Price and EPS Surprise

PEPSICO INC Price and EPS Surprise | PEPSICO INC Quote

Pepsi Doesn’t Just Make Pepsi

With a market cap of $149.3 billion Pepsi is certainly large, with retail presence in more than 200 countries. Pepsi also sells many other products, including Lay’s and Ruffles potato chips, Doritos tortilla chips and Cracker Jack popcorn to name a few.

Although Pepsi may be known best for their soft drink of the same name, there is much more to the company. Our research report states that 9% of the company’s revenue comes from innovation, or in other words new products. Over the past three years, Pepsi has introduced several products that have or are about to achieve more than $100 million each in annual retail sales. Pepsi is doing everything in its power to prevent stagnation, and it’s having a visible impact.

In response to a more health-conscious consumer base, Pepsi has been working on expanding a range of nutritious product offerings, which now make up approximately 25% of its revenues. In fact, as it stands now Pepsi only makes about 12% of its revenue from its soda and about 25% from its carbonated soft drinks in general.

Pepsi subsidiary Aquafina is also growing rapidly, having pulled in $960M in revenue and standing as the third most sold water bottle in the U.S. in 2015 according to Statista. Further changes to packaging and distribution are also increasing profit margins for Pepsi, and pave the way for a sustainable business model with emphasis on growth.

Not Done Growing Just Yet

As Investopedia explains, Pepsi’s snack brands currently hold a 36.4% volume share in the North American market. These include such brands as Lay’s, Doritos and Cheetos, amongst others. The gap between them and the next closest rival is large, with Kellogg taking second place with a share of 6.8% of the market. If Pepsi can increase this volume in North America alone, they are on track for solid growth.

Our report points out that currently 45% of Pepsi’s revenue comes from outside the U.S. as well. Developing and emerging markets have lower per-capita consumption, of which an increase will directly benefit Pepsi. Pepsi is currently expanding in Canada and the United Kingdom, along with developing markets such as Russia and Mexico. They are also increasing operations in such emerging markets as China, India, Brazil and Africa.

Each of these markets has untapped potential that could very quickly turn into further profit for Pepsi. In Mexico alone, Pepsi has a $5 billion expansion planned which will span the next five years. This information is supplemented by our year over year sales growth estimate of 3.26% for the next fiscal year.

Although emerging markets are subject to volatility in both directions, the Zacks Growth Score of ‘B’ attests to the firm’s solid track record and further potential. Pepsi management holds a similar view, expecting two-thirds of its revenues to come from emerging and developing markets moving forward

Bottom Line

Given these factors, investors shouldn’t be surprised that to note that we have Pepsi as a security with a Zacks Rank #2 (Buy). If you are looking for a strong, stable stock with a positive outlook and the tools to bring that outlook to fruition, keep Pepsi on you radar. The ages old axiom, “You can’t teach an old dog new tricks” may hold some credence, but Pepsi certainly has an array of tricks still up its sleeve and looks poised to be a great pick for investors in the future as well.

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