Can Gatorade Energize PepsiCo To $69 ?

After Gatorade witnessed impressive volume growth in 2011, PepsiCo (NYSE:PEP) is stepping up efforts to introduce a range of products aimed at sports nutrition. By testing on athletes such as NBA star Dwayne Wade at its Gatorade Sports Science Institute, the company is building a range of products suited to the needs of top athletes. ^[1]

Gatorade volumes jumped 8.1% to more than 1 billion gallon in 2011 according to Beverage Marketing Corporation. ^[2] Recently, the company launched a Gatorade commercial featuring Michael Jordon. PepsiCo competes with leading food & beverage companies around the world including Kraft Foods(NYSE:KFT), Coca-Cola Co (NYSE:KO) and Dr Pepper Snapple (NYSE:DPS).

We maintain a price estimate of $69, which is about 5% above the current market price.

See our complete analysis of PepsiCo

Due to a marketing fiasco combined with an economic downturn in 2009, the sports drink’s volume declined by 15% in the same year. However, the company has able to reinvigorate the volumes by successfully rebranding the beverage and extending the brand to G Series. Gatorade is one of the few beverages in PepsiCo’s portfolio which is experiencing a positive volume growth.

We estimate Gatorade contributes around 27% to PepsiCo’s stock price. The demand for juices, sports and energy drinks is increasing in the U.S. as consumers ditch traditional colas for healthier alternatives. Moreover, PepsiCo benefits from higher revenue per case for Gatorade (compared to traditional colas).

PepsiCo Won’t Cut Prices to Gain Soft Drink Market Share

PepsiCo CFO Hugh Johnston ruled out the possibility of the company offering discounts to boost its soft drink volumes. Instead, the company will attempt to gain market by launching new products such as Pepsi Next. PepsiCo’s market share in the U.S. Carbonated Soft Drink (CSD) has been declining consistently. To address the issue of flagging soft drink sales, the company plans to spend an additional $600 million on advertising with a greater focus on soft drinks.

Apart from launching its global campaign ‘Live for Now’, the company has also signed a partnership with Michael Jackson’s estate which will see the pop icon’s image on a billion Pepsi cans worldwide. 2012 is seen as a transition year for PepsiCo with company reaffirming its full year guidance of a 5 percent drop in EPS to $4.40.

Understand How a Company’s Products Impact its Stock Price at Trefis

1. Behind the gates at IMG Academies, Gatorade tests top athletes, heraldtribute.com, May 7, 2012 [↩]
2. The rise and rise of energy drinks: New data shows 14.4% volume surge in 2011, foodnavigator-usa.com, March 21,2012 [↩]