PepsiCo, Inc. (PEP): The Giant Becomes a Super Giant

American food and beverage giant, PepsiCo, Inc. (NYSE:PEP). released its earnings for 4Q12 on Feb. 14.

PepsiCo’s Earnings

Pepsi beat its market estimates for the fourth quarter and reported earnings of $1.66 billion or $1.06 per share, up from 4Q11’s earnings of $1.42 billion or $0.89 per share. As a result, the company has announced plans to repurchase stocks worth $10 billion. The stock repurchase program will be from July 1, 2013, to June 2016.  Moreover, the company has also announced it will increase its dividend by 5.6% to $2.27 per share, beginning in June.

According to the company, one of the major reasons behind its great performance was an increase in sales volume and prices. Further, the company’s renewed branding and excessive spending on advertisement also had a significant effect on sales.

In the fourth quarter, the company saw a 5% growth in its organic revenue. However, it was up 9% in the developing and emerging markets. In Russia, organic revenue grew by 10% while it was up 7% in Mexico. In the Asian market, PepsiCo’s recent partnership with Tingyi gave the company a further market share of almost 1.5 times.

Moving on to the products, Pepsi Next, which has 60% less sugar than the traditional cola, saw more than $100 million in sales during the year. The company’s 60-calorie sparkling beverage, Starbucks Refreshers, and Gatorade Energy Chews also had a great year. Talking about snacks, Doritos Locos Tacos reported record sales of more than 325 million shelves. As the company is all set to launch more products in 2013, the company expects even more from its partnership with Taco Bell.

In 2013, the company expects earnings per share to increase 7% to $4.39 per share while the revenues are forecasted at $68.2 billion.

Valuation

PepsiCo is trading at a forward P/E (1-year) of 16.43x , depicting the fact that it’s slightly more expensive than its rival, The Coca-Cola Company (NYSE:KO) . Further, it’s yielding a dividend of 3% on its stock. Using an average forward industry P/E (1-year) of 16.8x, Iwould value PepsiCo. However, as PepsiCo is expected to outperform its industry in the coming years, I would use a 15% premium while valuating the company.

Using consensus estimates, I value PepsiCo at $85. Hence, it is a hugely undervalued stock and has an upside potential of almost 17.5%. Adding its dividend yield in this gives us a total return of more than 20%. Therefore, PepsiCo is one of the most attractive buys in the carbonated soft drinks industry.