PepsiCo Inc.PEP

Morningstar Rating

Stock Research and Analysis

by Philip Gorham, CFA

We assign a wide economic moat to PepsiCo because of its economies of scale, its dominance in the snack category, and its effective distribution network. The direct store delivery system allows the firm to leverage its impressive portfolio of brands Read more

Bulls Say

PepsiCo owns 18 global megabrands, each with annual sales of more than $1 billion, including Pepsi, Gatorade, Mountain Dew, Fritos, Lay's, Doritos, Tostitos, and Quaker.

Through its Frito-Lay division, PepsiCo is the world's largest snack food company, controlling almost 40% of the U.S. salty snack market and around 30% of the non-U.S. market.

The acquisition of its leading North American bottlers is likely to allow Pepsi to be more flexible in its route to market than some of its competitors.

PepsiCo has successfully defended many of its products from competition and increased overall market share by investing heavily in marketing and research and development.

Having already built the infrastructure for its direct store delivery system, PepsiCo's distribution system acts as a barrier to entry because it would be difficult and costly to replicate. Read more

Bears Say

In the carbonated beverage category, Coca-Cola is the established leader, is located in many international markets, and has proved difficult to dislodge as the number-one player.

As the international segment, an important driver of PepsiCo's recent growth, becomes a larger piece of the business, profitability could suffer because of the lower operating margins generated overseas.

Pepsi's bottler consolidation has increased its exposure to commodity prices, and increases in key input costs could have a material negative impact on Pepsi's margins.

Bringing onto its books the assets of its less profitable bottling operations is likely to squeeze Pepsi's margins and lower its returns on invested capital slightly.

Carbonated drinks may become the latest target for tax increases as local and national governments, struggling to balance their budgets, look for new ways to raise revenue. Read more

Strategy

The firm plans to leverage its direct store delivery system to grow internally through innovation, as well as by strategic partnerships and acquisitions. PepsiCo has been expanding into adjacent categories, Read more

Management

Overall, PepsiCo has a high standard of corporate governance. Chairman and CEO Indra Nooyi has been at the helm since October 2006, and in that time, the firm has created returns to shareholders that have outstripped those of its peers. We are impressed Read more

Profile

PepsiCo manufactures, markets, and sells a variety of salty, convenient, sweet, and grain-based snacks, as well as carbonated and noncarbonated beverages and foods. The Read more

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