PepsiCo, Inc. (PEP): Half Is Doing Great

(Monster Beverage Corp (NASDAQ:MNST) participates in both carbonated and non-carbonated but doesn’t break down volume growth from each segment. This 17.6% increase is the total case volume increase in their last quarter.)

As you can see, PepsiCo seems to be underperforming virtually all of their competition in both the carbonated and non-carbonated beverage business.

Another ongoing issue with PepsiCo, Inc. (NYSE:PEP) is, they don’t seem to understand that Quaker Foods is slowing them down. This division finally turned in slightly positive revenue growth, but was the slowest growing division of the bunch. Selling Quaker Foods would both improve PepsiCo’s growth rate, and would give the company proceeds to shore up their balance sheet.

The Only Half Worth Buying
The bottom line is, half of this company is doing great and that half is known as Frito-Lay. Domestically, Frito-Lay saw volume up 4% in North America, 1% in Latin America, and 15% growth in PepsiCo’s international growth regions. Frito-Lay has been driving results and constantly propping up the lagging Pepsi beverage business.

If Frito-Lay were a separate company, this investment would be a no brainer. However, unless that occurs, PepsiCo just looks overpriced along with its industry. The company’s 2.6% yield and 8.9% expected growth rate as very similar to The Coca-Cola Company (NYSE:KO), but both companies sell for forward P/E ratios that are more than double their growth rates. While you could argue that these multiples are deserved based on each company’s strong history, their slowing future growth argues for multiple compression.

Dr Pepper Snapple Group Inc. (NYSE:DPS) offers investors an even worse deal, with a slightly better yield at 3.18%, but selling for almost 3 times its growth rate. Dr Pepper Snapple Group Inc. (NYSE:DPS)’s focus on carbonated beverages when that industry is slowing the most is particularly troubling. Even the formerly strong Monster Beverage Corp (NASDAQ:MNST) has struggled with earnings growth recently. The company’s use of promotions and discounts threatens to derail the company’s earnings. Analysts are calling for 19% EPS growth in the future, but based on the last few quarters, this goal looks unattainable.

Investors looking for a good yield have bid these stocks up under the assumption that they can’t lose. While the whole industry looks overpriced, PepsiCo, Inc. (NYSE:PEP) has multiple issues that it still hasn’t found a solution for. Frito-Lay is dragging the rest of the company along. Management either needs to find a way to grow the domestic beverages business, or the right thing to do is spin off Frito-Lay. It seems like that is the half investors are paying for anyway.

The article Half Of This Company Is Doing Great originally appeared on Fool.com is written by Chad Henage.

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