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Pepsi Hits a 52-Week High

Zacks Equity Research

Shares of beverage giant PepsiCo Inc. (PEP) hit a new 52-week high of $90.24 on Jun 20, 2014, recording an year-to-date return of 8.5%.

Pepsi’s shares have been on the rise as investors are encouraged by Pepsi Spire launched last month. The new soda dispenser revolutionizes the way carbonated beverages are served. Moreover, the strong business momentum and consistent beat for the past few quarters have provided an upside to the company’s share price.

Growth Drivers

Last month, Pepsi unveiled the digital soda dispenser, Spire, which is expected to directly compete with The Coca-Cola Company’s (KO) Freestyle fountain machines, available since 2009.

Pepsi Spire is a touchscreen soda fountain that reportedly resembles Apple, Inc.’s (AAPL) tablet or iPhone. Spire allows customers to make up to 1,000 personalized carbonated beverages by selecting their favorite Pepsi brands, including Pepsi, Mountain Dew, Sierra Mist, Brisk Iced Tea and SoBe Lifewater. (Read: Pepsi Brings Coca-Cola Freestyle Rival)

We believe that Spire also provides Pepsi an edge over Keurig Green Mountain Inc.’s (GMCR) upcoming Keurig Cold brewers and SodaStream International Ltd.’s soda makers. Keurig Green Mountain plans to launch its first Keurig Cold machine in 2015, which will use pods to make sodas, sports drinks and other beverages at the touch of a button. In order to increase its brand power, Keurig has already partnered Coca-Cola which will exclusively make Coca-Cola branded pods for the cold beverage system. (Read: Green Mountain Coca-Cola Close Deal).

SodaStream allows consumers the flexibility to decide the amount of carbonation, flavor, and sweetener in their drinks. We believe Pepsi’s Spire offers customers the best of both Keurig Cold and Sodastream’s carbonation drinks. Spire offers the same flexibility as SodaStream’s machines while Pepsi’s name gives it the brand power that Keurig Cold will enjoy.  

Moreover, investors are encouraged by Pepsi’s strong business momentum for several past quarters. The Zacks Rank #3 (Hold) company made a solid start to fiscal 2014 as the company beat the Zacks Consensus Estimate for both earnings and revenues in the first quarter of 2014. A strong snacks performance once again offset weakness in beverages.

With the latest earnings beat, Pepsi has delivered four straight positive earnings surprises with an average beat of 7.12%. Despite difficult consumer spending environment, lower-than-expected currency headwinds, aggressive marketplace investments, better execution, lower taxes and productivity gains boosted profits in the quarter.

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