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In this screen, we focused our attention on high-quality stocks that also offer worthwhile price-appreciation potential to 2016-2018. For starters, we restricted our search to equities that get our Highest Rank (1) for Safety. Within our universe of roughly 1,700 stocks, only about 120 meet this criteria. The two key components that determine our rankings are Financial Strength and Stock Price Stability. Notably, investors who put the most emphasis on these qualities are typically willing to sacrifice some long-term total return potential in return for the added downside protection that these equities afford.

Not surprisingly, issues ranked Highest for Safety typically don’t screen well for 3- to 5-year price appreciation potential. As it stands today, roughly 15 offer long-term price appreciation potential that exceeds 50%, the current median for the Value Line universe. Those that made the cut can be found on the list below. Of these, we have chosen to highlight the shares of PepsiCo Inc. (PEP).

PepsiCo Inc.

PepsiCo is a leading global food, snack, and beverage company. Its major brands are household names recognized throughout the world and include Quaker Oats, Tropicana, Gatorade, Lay’s, and Pepsi, among others. The company makes, markets, and sells its food and beverage portfolio in over 200 countries independently or through contract manufacturers. Its largest operations are in the United States, Canada, Mexico, Russia, and the United Kingdom. 

PepsiCo is organized into six divisions divided across four business units. The PepsiCo Americas Foods unit consists of the Frito-Lay North America division (21% of revenue in 2012), the Quaker Foods North America division (4%), and all of the Latin American food and snack businesses (11%). PepsiCo Americas Beverages (33%) comprises PepsiCo Beverages Americas and Pepsi Beverages Company. Finally, PepsiCo Europe (20%) includes all beverage, food, and snack businesses in Europe, while PepsiCo Asia (11%), Middle East, and Africa consists of all beverage, food, and snack business in those regions.

The company put forth a solid performance in the second quarter, delivering earnings-per-share of $1.22, $0.03 above Wall Street’s consensus estimate. A better-than-expected gross margin performance drove much of the earnings beat. This may be short lived, however, since commodity prices are expected to rise a bit in the second half of 2013. Still Pepsi’s disciplined pricing may help here. Currently, guidance is for EPS growth of approximately 7%, which does not include expectations for a moderate increase in currency headwinds in coming months.

Taking a look at the recent revenue performance, Frito-Lay North America stood out by posting organic sales growth of 4.2%, a solid showing compared to rival players in the space. The PepsiCo Americas Beverages division recorded a rather disappointing 1% sales decline.

Although near-term prospects may be mixed, the company is certainly investing in its future, and long-term growth potential appears bright. It will be spending $0.07 per share more than last year for business investment in the second half of 2013. Much of this will be to establish transportation routes and distribution facilities in the international market. We agree with the move since the company has ample room to grow overseas. This compares favorably to the largely saturated domestic market. A step up in research and development spending is also on the docket. We think this will help the company deliver solid risk-adjusted price appreciation over the next three- to five-years.

Overall, we think these shares are suitable for conservative long-term investors. With steady earnings growth and increased business investment, the shares may stay range bound for the intermediate term. However, we think investment in overseas operations and new products should help drive above-average long-term price appreciation.

 

 

Company

Ticker

Cardinal Health

CAH

Microsoft Corp.

MSFT

Total ADR

TOT

Allergan, Inc.

AGN

AmerisourceBergen

ABC

Bed Bath & Beyond

BBBY

Check Point Software

CHKP

Intel Corp.

INTC

Intuit Inc.

INTU

Kyocera Corp. ADR

KYO

Laboratory Corp.

LH

Oracle Corp.

ORCL

PepsiCo, Inc.

PEP

Royal Dutch Shell 'A'

RDS/A

Teva Pharmac. ADR

TEVA

   

At the time of this article's writing, the author did not have positions in any of the companies mentioned.