TheStreet PepsiCo Stock Should Remain Bubbly Ahead of Fourth-Quarter Earnings

The world may be drinking less soda on average, but profits at beverage and snack food giant PepsiCo are not running dry. And unlike at its chief rival Coca-Cola. Pepsi’s diversified business model has become an asset. Investors looking for revenue and earnings growth have invested in the right stock.

With year-to-date stock gains of 2.27% — outperforming the 0.52% gains in the PowerShares Dynamic Food & Beverage Portfolio — beverage and snack food giant PepsiCo continues to benefit from a superior diversified business model that bests competitors that are focused solely on beverages. Pepsi reports fourth-quarter and full-year results Wednesday before the open.

Pepsi stock closed Friday at $96.71; by midday Monday it was at $96.37, down 0.37% for the day. Pepsi’s year-to-date gains have beaten both the Dow Jones Industrial Average and the S&P 500. which have traded flat.

The Purchase, N.Y.-based company has figured out how to thrive where Coca-Cola has failed. Pepsi does have a solid beverage business of its own, but unlike Coca-Cola, Pepsi has been able to offset weak global beverage sales by growing its snack foods business.

Pepsi says of its Frito-Lay potato chips , Bet you can’t eat just one. And snacks have been a key differentiator. Pepsi’s brands have extended to Lipton, Doritos , Quaker, Gatorade, Tostitos and others. Each of these popular brands has become a significant contributor to Pepsi’s revenue and profits, helping offset weak beverage sales.

In the most recent quarter, Pepsi posted revenue of $17.22 billion, growing at just 1.8% year over year. Out of that total, Pepsi’s American beverage unit accounted for 48% of total revenue, down 0.4% year over year. Volumes were also down 1.5% year over year. And in Europe, Pepsi’s second-largest segment, revenue declined 1.4% and margins declined to 12.4%.

This means that Pepsi’s largest segment is being pressured in both revenue and profits. Global soda consumption is on the decline. Consumers are moving toward healthier beverage alternatives like tea and water — an issue that is also impacting Coca-Cola and Dr. Pepper Snapple .

But Pepsi’s food segment, which accounts for 52% of revenue, posted a 3% jump in revenue during the quarter. Not only were sales volumes up 2% year over year, Pepsi saw no adverse impact on revenue even though it raised prices by an average of 1% per product, leading to operating margins expanding to 29.1% of revenue.

This also suggests that activist investor Nelson Peltz — who is demanding drastic operational changes, including breaking up the snack food business — may need to rethink his demands.

After posting 14% stock gains in 2014, compared to just 2% gains for Coca-Cola, the gap between the two rivals is expected to widen. Pepsi is projected to grow earnings at double the annual growth rate of Coca-Cola in the next five years, at 6% vs. 3%.

Analysts have given Pepsi a consensus buy rating and an average price target $102.50. They expect Pepsi to deliver a 3% jump in earnings per share, reaching $1.08 on revenue of $19.66 billion.

Pepsi’s formula is working. With the company paying a 2.71% dividend  yield and actively buying back its stock, Pepsi shares should remain bubbly for the next 12 to 18 months, heading for $115.