20 January 2007


This blog has already discussed two beverage companies: PepsiCo and Anheuser Busch. PEP's corporate reports were used as examples in the earliest postings to explain financial statements and our approach for analyzing them. BUD was the subject of a separate analysis. Considering the small set of companies we analyze regularly, the fact that we track two huge beverage companies could reflect our tendency to adhere to Peter Lynch's famous maxim to "invest in what you know."

Morningstar.com analyst Matthew Reilly recently issued an insightful report on "Which Beverage Stock Makes the Best Investment?" He addressed the domestic and international earnings potential of Coca-Cola, PepsiCo, Anheuser-Busch, and Diageo. Whereas we analyze dry accounting data, without looking into how the company actually works, Mr. Reilly evaluated how the marketing strategies and management agility of the four companies drive their long-term performance.

We wondered how the Morningstar approach stacked up to our own. We liked how Morningstar tied the managerial performance to corporate growth potential, but we would have preferred to see greater discussion of stock price valuation. Sales and earnings increases are wonderful, be we don't want to overpay for them -- see Growth at a Reasonable Price (GARP). To be fair, Mr. Reilly was considering investments for a ten-year time frame; this would be a valid reason to give less weight the current stock price when making an investment decision.

On our gauge-based scoring system, using PepsiCo's financial results through 9 September 2006, we reported that the company earned a
tepid Overall score of 29 points out of 100. We noted approvingly that the Growth gauge had picked up, but we were concerned that the Value was low because of a too-lofty stock price. We indicated that we would wait for the stock price to drop before re-assessing the company. For the record, PEP's stock price was $64.73 on 9 September, and it is $64.82 today; given that the S&P 500 index moved up almost five percent during this period, it appears that our stated concerns about PEP's value were not unique.

Mr. Reilly noted that Pepsico is growing at Coca-Cola's expense -- a tribute to superior management.

Our evaluation of BUD, using data for the quarter ending 30 September 2006, gave the company an overall score of 21 out of 100 possible points. We caustically (and perhaps undeservedly) noted that their products are a better value than the stock. In this case, the market had a different view, since BUD's stock price is up about 7 percent from 30 September.

Morningstar indicated that BUD management was less nimble (i.e., more reactive) than its competitors, or, in other words, more like Coca-Cola than PepsiCo. He rated PepsiCo as the one beverage company worth holding for the next decade.

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