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Pepsi and the Process

A few months ago, I wrote a post on my investing process called: Why Do I Invest?. In section 4, I talk about connecting the story of a company (recent news, patterns in performance, products, predictable faults, etc.) to the numbers (debt, P/E, ROE, etc.).  I do feel it necessary for me to reiterate the importance of this because of a quote from a recent article.


“I picked Pepsi because I love Sun Chips. Cheddar Sun Chips are my favorite — that’s how I pick most of my stocks.”

Yes, I did buy Pepsi in part because of their products. But I picked it for more than just my growing love of the products, I picked it because a majority of our population buys Pepsi products. It started because I like their products, but it did not end there. I did more research than just open up a bag of chips and fall in love. Just as Aunt Ginny did, I looked at the company and tried their products, along with checking the numbers and learning more than just the calorie count of 12 servings of Cheddar Sun Chips.


Let’s start off my process with a fun fact: Pepsi makes more money on their chips than they do with their soda. With a brand valued at $10.6 billion, they’re bound for success as long as they follow the trends and listen to their consumers. To show off more of their power in the industry let’s look at their best-known brands (other than Pepsi): Sodas like Mountain Dew, Mug Root Beer, Lay’s, 7Up; Juice and Still beverages like Tropicana, Aquafina, and Snacks like Doritos, Cheetos, and yes Sun Chips. Those are nine of 22 brands each valued in the billions. In 2012, 48% of Americans drank soda (or pop in Minnesota), but Pepsi is more than just soda.


I know that many think of Pepsi as the little sister of Coca-Cola, but there are facts to prove that the belief is false. American’s soda consumption has hit its lowest point since 1986. On the other hand, by 2022 the market value of potato chips is supposed to be $40.3 billion. Coca-Cola’s brands are solely devoted to the drink industry, leaving Pepsi to take over the chip sector of the market. Currently, Pepsi’s brand, Frito-Lay’s, makes up 20% of their sales, and only 12% of their revenue comes from their soda.


Now that I did a little bit of research and know basic facts about the company and it’s potential, I can look at the numbers.


Company
Price to Earnings Ratio
20 or lower
Dividend Between 2-5%
Gross Margin
25% or higher
Return on Equity (ROE)
15% or higher
Debt
1.0 or lower
Pepsi (PEP)
24.13
3.22%
19.31%
16.73%
2.95


With a Price to Earnings Ratio at 24.13, it’s a little high, and so is their Debt. Their Gross Margin is a low as well. Right now might not be the best time to buy in my opinion, but with their brand and capability to perform well, I’m not ruling it out. If Pepsi’s stock fell 17% from today's price ($116.78) to $96.80 per share, in my opinion, it could be a good time to buy.

Investing should be as simple as possible, but buying a stock takes more work than just eating Sun Chips. Mock me all you want, but don’t mock the process. 

If I haven't gone over it enough, here is my step by step process:

1. Find a product you like.
2. Check to see if it has a stable moat to test your beliefs that it is here for the long term.
3. Is it Socially Responsible and/or Sustainable?
4. Learn about its potential by checking the news, simple statistics (how many people drink soda, how much that percentage is decreasing, etc.), and predictions.
5. Make sure the numbers back up the story, and either buy or wait for a desired price.
6. Follow the company because numbers, products, etc. change with the times.

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