PepsiCo, Inc. (PEP): Can This Soda Giant Take On Yogurt’s Big Wigs?

Under the Covers

Seeing Pepsi move aggressively into a new category is a testament to the company’s long-term focus on growth. Sales have grown fairly steadily over the last decade, dipping only twice. The first drop was a less than 1% decline in 2009 and the second was a 1.5% shortfall last year. Earnings have roughly doubled over the decade, though the bottom line fell almost 3% in 2012.

The company describes 2012 as a transition year. Yogurt is part of the shift. The shares yield around 2.8%, backed by more than a decade of dividend increases, and are trading near all-time highs. That and a near 21 price to earnings ratio makes them most appropriate for growth and income investors.

Established Names

For those interested in yogurt, but not willing to take on the risk of a newcomer, General Mills and Danone are both better options. General Mills is a large packaged food company in its own right, with products ranging from Yoplait to Pillsbury and Cheerios. The company’s top line grew nicely last year, but had been stagnant for three years before that. Widening margins, however, kept earnings advancing in those years. Margin compression, meanwhile, led to a bottom line decline last year.

Commodity inflation and pricing weakness were the main reasons for the weak earnings. That said, the company is well positioned in the packaged food industry and offer investors an around 3.1% dividend yield. Its PE is around 18. Like PepsiCo, Inc. (NYSE:PEP), growth and income types should like this stock.

Danone, meanwhile, saw its top line head higher last year but margin compression led to flat year-over-year earnings. Yogurt, meanwhile, is one of just four major product categories for the company, so this is the purest play of the trio in the yogurt space.

Danone, however, is a leader in the healthful food push, with its Activia brand and a growing medical nutrition business. The shares yield around 2% and the head start in healthy and “medicinal” yogurt is a key differentiation that should help protect market share and support long-term growth. Danone, with a PE of around 20 and a lower yield, would be a good option for more growth minded investors.

The article Can This Soda Giant Take On Yogurt’s Big Wigs? originally appeared on Fool.com and is written by Reuben Brewer.

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