PepsiCo to Perform In-Line

Strong international growth, productivity improvements, an aggressive share repurchase program, and a strong new product pipeline are driving low double-digit earnings growth for PepsiCo, Inc. (PEP). Nevertheless, a sluggish domestic carbonated beverage environment, modest low-single digit volume growth at Frito-Lay (3% in both 2006 and 2007), and pressure from higher energy and raw material costs (especially orange costs) are concerns.

PepsiCo stock is currently selling at 21.2 times trailing 12-month EPS, reflecting the company's growth profile, primarily due to the significant exposure to the snack food category. Between 2000 and mid-2002, PepsiCo stock traded in a P/E multiple range of 25 to 34, reflecting that the company's earnings were growing at a 20% compound annual growth rate (CAGR). However, the earnings report for the second quarter of 2002 was very disappointing, as volume and revenues grew more slowly than expected, and Tropicana reported a 3% decline in volume.

Earnings plateaued for a year, and the stock's valuation shifted to a P/E multiple range of 18 to 25. CSD volume in the U.S. soft drink market has declined for the last four years. We do not expect PepsiCo stock to outperform until expectations for volume growth at FLNA [Frito Lay North America] accelerates to 5% or more. The Hold recommendation is maintained. The target price of $77.75 is based on a 23 P/E on trailing 12-month earnings.

Expect Big Things from Baidu.com

Baidu.com's (BIDU) financial results for the fourth quarter again significantly exceeded the market consensus. With China's most popular search engine, Baidu has an advantage over rivals in China's fast-growing online advertising market.

In addition, Baidu continues to expand its product lines to attract users and boost revenue. Baidu has successfully increased its market share in the Internet search industry in China in the past four years. Its market share in 2006 was 55.2%, compared with only 28.7% in 2005. This uptrend of Baidu continued in 2007.

It is widely believed that currently Baidu has more than 60% of the market share in the Internet search industry in China. Based on statistics of .comScore, Baidu's market share in the world is only behind Google (GOOG) and Yahoo (YHOO).

According to the China Internet Network Information Center, Baidu is the first choice for nearly 75% of Chinese search users. Although fierce competition from Google and Yahoo prevents Baidu from building a wide economic moat and Baidu's Japan expansion will continue to negatively affect its financial results, we think Baidu is currently undervalued based on its growth prospects.

The stock is currently trading at 62.2x our estimate for fiscal year 2008 earnings per share, which is significantly higher than the industry mean and that of its Chinese peers. The stock is also trading at 41.4x our estimate for fiscal year 2009 earnings per share. Using a P/E multiple of approximately 50x our fiscal year 2009 earnings per share estimate yields a target price of $315, which we believe reflects the company's growth prospects.