PepsiCo, Inc. (NYSE:PEP) laid another beat-down on its supposed rival, The Coca-Cola Co (NYSE:KO), with its fourth-quarter earnings. While PEP stock wasn’t doing much Wednesday morning, the company still proved once again that its strategy of combining food and drinks is the right one.
For the quarter ending in December, PepsiCo had $1.401 billion (97 cents per share) in net income on revenue of $19.515 billion. For the year, net income was up 16% year-over-year, to $6.329 billion ($4.36), on revenue that was fractionally lower $62.799 billion.
Stories about the earnings and PEP stock differed on their angles.
Reuters said the company was profiting from its focus on healthy snacks and drinks. USA Today noted that profit was down and said sugary drinks face hurdles. MarketWatch fretted over the impact of the strong dollar and CEO Indra Nooyi’s prediction the company would face “global challenges” in 2017.
But isn’t that what Bill Belichick always says, too? That we’re always facing challenges, but if we just do our job, we’ll win?
It seems to work.
Fat on Fried Food
The key difference between Coke and Pepsi is strategic. KO only does drinks, while PEP also does food.
Pepsi owns both Frito-Lay, whose sales were up 10% year-over-year in the fourth quarter, and Quaker Foods, whose North American profit was also up 10% year-over-year. Coke, by contrast, has steadfastly refused to go outside its niche of drinks since selling Columbia Pictures in 1989.
Pepsi has also been ahead of Coca-Cola on consumer trends, switching to organic ingredients for Gatorade and now claiming to get 45% of its revenue now from “guilt-free” products with less sugar and fat than before.
Had your retirement fund bought stock in both soft drink giants after the 1996 Olympics in Atlanta, Coke’s home town, Pepsi’s performance would have quadrupled Coke’s gains, and that’s not even counting the 1997 Yum! Brands, Inc. (NYSE:YUM) spin-off. Stock in YUM originally worth $4 billion is now worth $25 billion.
The gap has mostly widened under Nooyi, who has now been CEO of Pepsico for almost 10 years.
Over the past five years, gains in Pepsi have tripled those of Coca-Cola, and under Nooyi the dividend on PEP stock has doubled to the current 75 cents per share. The stock is considered a poor income play only because it has delivered fat capital gains, doubling in value since the bottom of the last recession.
Again, a Belichick-like performance.
What Comes Next for PEP Stock?
Some analysts, like our own Nelson Smith, have written of suggestions that Pepsi spin-out its food unit for a 20% gain, then make a run at Mondelez International Inc (NASDAQ:MDLZ), which sells higher-end candy and cookie brands like Cadbury and Oreo.
But Nooyi, who is now ranked as the second most-powerful woman on the planet, would probably tell critics not to over-think things. She says her key skill is being able to simplify complex subjects, turning masses of numbers into simple stories. Nooyi’s troops will be in Sundance, looking for film projects, good stories, it can back with product placements.
Nooyi can tell critics that Pepsi is a standout in a lackluster industry, and that they should watch the “zero calorie” strategy the company launched at the recent Super Bowl. (Belichick won that one, too.)
The Bottom Line
While Coke has recently changed managers, announcing that James Quincey will succeed Muktar Kent as CEO in May, Pepsi is a picture of stability. PEP stock has a solid track record of gains, both stock gains and dividend increases, going back eight years now, and is being proclaimed by some as “one name to own forever.”
It’s hard to argue with the track record. In its competition with Atlanta, Pepsi management is the one with all the rings.
Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing, he did not hold a position in any of the aforementioned securities.
