Reasons To Buy:

Strong Brand Recognition: Pepsi is one of the largest food and beverage business in North America and the second largest in the world. It markets hundreds of brands in more than 200 countries. The company is the number two global player in beverages, a global leader in salty snacks and owns an attractive global nutrition portfolio boasting of brands like Quaker, Tropicana and Gatorade. The company has a diverse portfolio, both geographically and product wise. Pepsi’s overall product portfolio includes 22 Billion Dollar brands including Pepsi, Mountain Dew, Gatorade, Tropicana, Lay's, Doritos, Cheetos and Quaker, which generate more than $1 billion each in retail sales annually.

Pepsi has the competitive advantage of selling both snacks and beverages, which are complementary food categories. Salty snacks and liquid refreshment beverages have extremely high co-purchase incidence more than any other commonly purchased items. The complementary portfolio results in cost leverage, capability sharing, cross-category promotions and other commercial benefits. Also, the company’s enormous size gives it a scale advantage in areas such as procurement, IT, back office, joint Pepsi customer teams and Research & Development (R&D) innovation which subsequently improve productivity and margins.

Pepsi was founded in 1965 through the merger between Pepsi-Cola and Frito-Lay. Tropicana was acquired in 1998 and PepsiCo merged with Quaker Oats Company in Aug 2001. Pepsi’s long-term targets include mid-single-digit constant currency net revenue growth, 30–50 basis points (bps) expansion in core operating margins and high single-digit core constant currency earnings growth.

Strong Snacks Business: Pepsi holds the number one position in global snacks with popular brands like Doritos, Cheetos and Lay’s. Just over half of Pepsi's sales come from snacks, while the remainder is contributed by beverages. Pepsi’s strong and growing snacks business has largely offset its sluggish beverages business in the several past quarters. The Frito-Lay North American snacks business has delivered consistent solid performance over the last three years. The segment is expected to continue delivering strong sales and profits as the demand for savory snacks is rising.

Notably, Pepsi’s recent innovation efforts in snacks focus mainly on higher-margin healthy and premium salty snacks as there is a definitive market for such products now. Its premium snacks like Quaker Breakfast Flats crispy baked snack bars, Simply Tostitos Black Bean chips and others are expected to drive solid top line growth going forward. Importantly, premium products generate higher margins and should thus boost profits of the company as well.

Aggressive Marketing and Brand Building: Over the years, Pepsi has grown through product innovation and countered competition successfully.

Since 2013, the company has significantly stepped up its advertising & marketing (A&M) and R&D investments to strengthen its brands and accelerate product innovation.

Pepsi is spending on its biggest brands. The company has increased investments in social and digital marketing as well as improved advertising efficiency by directing more of the spending to consumer-facing activity. As of 2016, the company has stepped up its investments in R&D by 45% since 2011, investing approximately $3.5 billion on R&D cumulatively over the past five years.

The company’s A&M and R&D plans have been paying off. These initiatives helped the company to deliver an overall healthy performance — either achieving or exceeding most of its financial goals in the year — despite the tough macroeconomic environment.

A&M, as a percentage of sales, was up 40 bps in 2016 and 145 bps since 2011, while focus remains on improving returns from advertising investments.

Focus on Innovation: Product innovation plays a huge role in the company’s success. The company regularly creates new flavors of existing products alongside maintaining a robust pipeline of new products. The company has generated $5 billion in annual sales from new products since 2013, as innovation continues to support top-line growth. In 2016, the company launched a number of new low and reduced calorie drinks like new recipes of Mirinda and 7UP with 30% less sugar, which has been rolled out in over 80 international markets.

Currently, a major portion of Pepsi’s total net revenue comes from “Guilt-Free” products, over half of which comes from the “Everyday Nutrition” category. This percentage is likely to increase given the company’s stepped up innovation and focus on adapting to changing consumer preferences. The company has been investing in advanced manufacturing technologies, like its exclusive frying innovation that can reduce the amount of fat in potato chips by 20%.

In 2016, PepsiCo acquired a sparkling probiotic U.S. drinks company KeVita, thereby diversify its soft drinks portfolio amid slowing soda sales. Addition of KeVita will expand PepsiCo’s health and wellness offerings in the premium chilled beverage space.

Most of the company’s latest line-up of products offer health benefits like reduced calorie beverages, non-carbonated beverages and healthier snacks.  The company is growing its nutrition brands like Quaker, Tropicana and Gatorade and expanding the portfolio of nutritious products in growing categories, such as dairy, hummus and other fresh dips, and baked grain snacks. The company is working to offer more products with less sodium, sugar and saturated fat, to reap benefits from a shifting consumer preference towards good-for-you and health and wellness products. Over time, the company’s product profile has grown from fun-for-you to a more balanced offering of good-for-you, better-for-you and fun-for-you products.

In order to revitalize cola sales, which are suffering due to high calorie content, the company is testing cola product variations using evolutionary natural sweeteners in various markets.

Moreover, Pepsi has broadened its beverage portfolio to include more non-carbonated beverages to decrease the dependence on colas. In fact, the company generates just 12% of its revenues from trademark Pepsi and less than 25% from CSD, globally. In North America, the company launched LIFEWTR in Jan 2017, a premium bottled water, PH balanced, with electrolytes for added taste.

The company also invests aggressively in new packaging to shift consumers to more profitable purchases. In North America over the past five years, the company has shifted some percentage of its CSD volume mix from multi-pack packages to higher margin, more profitable single-serve and alternative multi-serve packages. These efforts have been driving higher net price realization and margins in North America.

The company is also exploring new categories like dairy with the Wimm-Bill-Dann acquisition in Russia, the JV with Almarai in the Middle East and Muller Quaker Dairy JV in the United States.

Regular product and packaging innovation in the United States has led to improved sales and market share performance for Pepsi.

Strong International Presence: Pepsi generates a significant part  of its revenues outside the United States. Developing and emerging markets have significant growth potential due to their relatively low per-capita consumption. Another reason is the burgeoning middle-class population with rising income levels which has increased the demand for convenient, on-trend, affordable food and beverages.

The company is expanding in developing/emerging markets like Russia, Mexico, China, India, Brazil and Africa through tailored distribution models as well as by offering locally relevant innovation and value-added products. In Mexico, Pepsi has a massive expansion plan in place, worth $5 billion, spanning the next five years. India is also a high-priority market for Pepsi where it plans to invest around $5.5 billion for expansion by 2020.

Currently, most of the developing markets are grappling with slow growth, challenging GDPs, significant political unrest, high unemployment and low consumer spending power due to high levels of local inflation. Despite these pressures, Pepsi has consistently done well in these markets. The company’s international divisions delivered solid organic revenue growth in 2016, buoyed by high single-digit growth in its developing and emerging markets, led by solid results in Mexico, China and Egypt, which drove organic revenue in the double digits.

Productivity Improvement and Cost Savings Program:  The company’s focus on driving both efficiency and effectiveness, has resulted in approximately $1 billion of annual savings since 2012 and is expected to generate approximately $1 billion in 2017.

In 2014, Pepsi successfully completed its restructuring program — Productivity Plan — launched in Feb 2012. In Feb 2014, the company announced a new five-year restructuring plan to generate annual productivity savings of $1 billion each from 2015 to 2019 through next-generation productivity initiatives. The savings are coming from improved efficiency through increased manufacturing automation, optimization of global manufacturing including the closure of certain manufacturing facilities and increasing capacity utilization, re-structuring go-to-market systems in developed markets, expanding shared services and simplifying organization structures.

In the past couple of years, Pepsi has automated high-speed packaging lines across the globe, increased packaging line speeds by up to 50% while at the same time eliminated production bottlenecks and significantly reduced the labor costs. Moreover, the company has captured significant savings by using advanced logistics planning processes and tools and through implementation of Smart Spending program, which is reducing discretionary spending areas like travel, facilities and consulting.

Savings from these investments and technology and operational changes are being re-invested in the business to drive top-line growth.

Attractive Shareholder Returns: Pepsi regularly returns value through higher dividends and share buybacks and reinvests greatly in its business. Pepsi’s 10-year annualized dividend per share has grown at a compounded growth rate of 10%, while cash returns over the same period were more than $65 billion.

Pepsi has increased dividend for 45 consecutive years, including increases of 7% in 2017, 7.1% in 2016, 7.3% in 2015, 15% for 2014 and 5.6% for 2013. Also, it bought back shares worth $3.2 billion in 2012, $3.0 billion in 2013 and $5 billion each in 2014 and 2015, $3 billion in 2016 and plans to repurchase approximately $2 billion shares in 2017.

It expects to return a total of $6.5 billion to shareholders in 2017 through the repurchase of approximately $2.0 billion worth of shares and dividends of around $4.5 billion.