Should You Buy Tropicana on OJ Day?

Today celebrates orange juice in the U.S. but both Coca-Cola and PepsiCo might not be a buy.

Ruth Saldanha 4 May, 2022 | 4:38AM
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Orange juice

On May 4th, the U.S. celebrates National Orange Juice Day, which has been described as “a lighthearted day set aside to recognize how vital a glass of OJ is to have on breakfast tables across America.”

Orange Juice is popular, and the most popular brand, according to Statista, is Tropicana, which is owned by PepsiCo (PEP). The brand had over US$1 billion in sales in 2021. The second most popular is Coca-Cola (KO) owned Simply Orange, with US$828 million in sales in 2021.

Since merging with Frito-Lay in 1965, Morningstar analysts believe PepsiCo has demonstrated a proclivity for expanding its portfolio in ways that allow it to ride various secular tailwinds, illustrated by its purchases of Tropicana and Naked Juice.

You might ask, is today a good time to buy Tropicana’s owner, wide-moat PepsiCo? Morningstar equity analyst Chris Owens thinks it does not make sense to build a position right now, because the stock is fairly valued.

“We believe wide-moat Pepsi’s advantaged competitive position in snacks and beverages was evident in the first quarter of 2022, as demonstrated by the pricing power that emanated from its leading brand mix. It chalked up 11% and 6% volume growth in Africa, the Middle East, South Asia (6% of sales) and Latin America (9% of sales), respectively, despite significant price increases of 7% and 16%. By tailoring its mix to evolving consumer trends, Pepsi can achieve mid-single-digit revenue growth long term, in our view,” Owens says.

He thinks he might increase his US$154 fair value estimate slightly to reflect the time value of money, but, “With shares trading at a low-double-digit percentage premium to our intrinsic valuation, we would not advise building a position,” he says.

The 2-star stock has significant competitive advantages, though, indicated through its wide economic moat. Scale is usually the epicentre of the cost advantage moat source when it appears in the snack food and beverage spaces, and Morningstar analysts believe both industries are conducive to scale efficiencies. Pepsi enjoys leading production volume in many of its categories, which allows for favourable unit economics in manufacturing processes.

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Securities Mentioned in Article

Security NamePriceChange (%)Morningstar Rating
Coca-Cola Co64.30 USD0.36Rating
PepsiCo Inc170.11 USD0.67Rating

About Author

Ruth Saldanha

Ruth Saldanha  is Editorial Manager at Morningstar.ca. Follow her on Twitter @KarishmaRuth.

 
 
 

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