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Behold the Frito, the salty snack industry's ambassador to the world. What could be more innocent, more lovely, more convenient, more consistently tasty or more emblematic of American culinary coolness than the golden, curvaceous, spicy corn chip invented in San Antonio during the Great Depression?

Everywhere I traveled in the shadow of war last week -- from Durham, N.C., through Charleston, S.C., Savannah, Ga., and Orlando, Fla. -- the familiar orange-and-red-foil package manufactured by the Frito-Lay division of


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beckoned to be bought. Whether you're walking through an airport concourse or visiting a university cafeteria, a hotel lobby, a small-town gas station, a big-city supermarket or a theme-park restaurant, you're rarely a couple of minutes away from a chance to ingest 20% of your recommended daily allotment of fat from a small bag of deep-fried corn, sunflower oil and salt.

Not many consumer products can make this claim. Even mighty


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isn't everywhere because most dining and vending venues offer either Coke or Pepsi, but not both. And you can't buy a


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hamburger everywhere, nor a Budweiser.

Fritos Everywhere

Powered by a multilayered distribution system that is second to none, Fritos -- along with brothers-in-arms Doritos and Cheetos -- is among the most widely distributed items available for sale in the world. Indeed, Pepsico is the No. 1 supplier for U.S. food retailers in terms of sales, profits and cash flow growth, according to a study by J.P. Morgan Securities.

So why has the company -- also maker of such premier brands as Mountain Dew, Gatorade, Tropicana juices, Lipton tea and Rold Gold pretzels, not to mention the flagship Pepsi line -- lost its crunch with investors in the past year?

Most commentaries on the stock market malaise hold that Iraq war threats are holding back stocks of nearly every stripe due to the fear that consumers will withdraw into their shells when the tanks roll. Yet that doesn't seem a likely culprit here. Americans might buy fewer personal computers or dining room sets because they're scared to go outside, but chow fewer Fritos and chug less Dew? If anything, authorities say, we actually eat more when we're freaked out.

No, Pepsi's soggy performance today is emblematic of the larger problem in the market: an expanding aroma of apathy. Yet this is one stock that could come out of the downturn crisply if investors regain their appetite.

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Better Long-Term Performance Than the S&P

Like many old-line manufacturing concerns, Pepsico shares lagged the market benchmark

S&P 500

Index in the mid- to late-1990s, only to bubble to prominence once the bear market began in 2000. From 1995 to 2000, the broad market rose 220% while Pepsico stock rose just 127%. But from 2000 to April 2002, the shares rose 48% while the S&P 500 fell 25%. All told, since 1995, this stock has doubled the performance of the market, 167% to 85%.

Pepsico's serious problems with investors have come more recently, as the stock has tracked the broad market for the first time in the past decade, down roughly 23% in the past eight months. One headline reason: Pepsico's management announced that it would no longer provide earnings guidance, making the firm seem evasive. Additionally, executives acknowledged they probably can't grow earnings from the beverage side of the business more than about 4% a year and would seek the bulk of profit growth -- 8% annually -- from its salty snacks.

Is that so bad? Not really. And that's what's so interesting about this story. Throw in expected expense cuts of $800 million over the next three years, owing to increased production efficiencies and synergies from its $13.4 billion purchase of Quaker Oats, and management has promised annual earnings gains of about 11%. Results like those would be great for a premium, noncyclical growth stock that trades at a 40% discount to its five-year average price-to-earnings multiple.

But how can Pepsi grow snack revenue 8% when its products are already ubiquitous? That is the key challenge. But consumer goods companies have an edge in this realm over high-tech manufacturers, as they can use clever research, product development and advertising to breed and encourage new tastes relatively quickly. Figure on seeing 40 new products in the first half of this year, double the number of last year.

Pepsi plans to grow the niche, for instance, by focusing on healthier eaters who don't currently buy its products. It will try to sell more of what it calls "better for you" snacks, such as Baked Doritos that have about one-third less fat than the traditional Doritos.

Next month, Pepsico will leverage the natural-foods buzz of its Quaker division to enter the "macrosnack" segment of the industry, which are products that encourage consumers to replace a meal with a snack. (I just ate a macrosnack instead of breakfast, a SuperProtein bar made by the Odwalla unit of Coca-Cola.)

And Pepsi will add new form factors for existing snacks, such as the new Lays Stax brand, which will compete with Pringles for control freaks who like their chips in a neat package. Last year's introduction of "Go Snacks," 8-inch-tall screw-top canisters for Doritos, Fritos and Cheetos, was a big hit with kids and let the company double its net revenue per pound, according to a J.P. Morgan analysis.

On the beverage side, Pepsi has just introduced a lemon lime soda called Sierra Mist that it hopes to make a serious competitor to 7-Up and Sprite with a $50 million ad campaign. And it will leverage Gatorade's 85% share in the athletics drink segment by pushing it deeper into more schools, vending machines and unusual distribution points.

Importantly, the company has elected to use Gatorade to focus on new ethnic food and beverage opportunities as well; an example is the new Xtremo sub-brand of sport drink, which is aimed at Latino consumers with flavors like Mango and ads in Spanish-language publications. Tropicana is the weak spot in the picture, as Coca-Cola's Minute Maid division provides formidable innovation and pricing competition.

On the operations front, Pepsico has created what it calls its "168 Hours" plan to run its production facilities around the clock (seven days a week times 24 hours a day equals 168 hours). The company says production efficiencies will help it save $200 million by eliminating the need to add new plants for the next three to five years. That may be bad for the industrial machinery and real estate industries, but good for Pepsico shareholders.

Managers say they'll also make the business more efficient by changing the way it ships potatoes to save 50% of its waste, increase "warehouse velocity" by optimizing the company's supply chain and improve selling systems with less expensive displays and other methods to get into smaller accounts.

What Are the Risks?

Of course, there are a few things you can be worried about.

First, the stock is not an absolutely screaming buy from a valuation standpoint, so growth buyers probably won't get much support from the value crowd.

On the balance sheet, the level of intangibles is much higher than you'd like, at $4.9 billion through the last quarter. If the company decides it overpaid for Quaker Oats, as critics have suggested, and must declare an impairment of the "goodwill" portion of that number, a significant write-off could spook investors.

On the cash flow statement, free cash flow growth, while healthy, isn't keeping pace with reported earnings growth -- often a red flag that earnings quality is not all it should be.

And all insider transaction activity in the past two years has been on the sell side, suggesting that officers and directors do not view the company's shares as a compelling bargain.

Yet not much has to go right for Pepsico, now trading in the high-$30s, to be a 20% gainer for your portfolio by the end of the year. A return to the $45 area where it met resistance last summer should be a lock in the event that the broad market rallies on the strength of any improvement in investors' mood.

If you want to play it safer, as I would, look for an opportunity to buy at $34 to $35.50, the price where the stock found solid support both in 1999 and in July and October last year. The risk is to $30, which would be a 13% decline from the $34.50 level, while upside potential to $45 is 29% -- decent odds.

At its analyst day earlier in the month, Pepsico officials said they were comfortable with earnings of $2.19 a share to $2.23 in fiscal 2003. With a P/E multiple of 20, which is at the low end of its five-year range, the stock ought to be worth $43 to $45 on a valuation basis if the guidance is accurate. Boost the multiple to 25 in the event of spicier investor attitudes, and you can see $55 on the horizon, which was the April 2001 high.

You don't need rose-colored glasses to see the company making the lower end of these numbers. Just a little less smoke and fear. For the brave and hungry, it's almost snack time.

Jon D. Markman is senior investment strategist and portfolio manager at Pinnacle Investment Advisors. While he cannot provide personalized investment advice or recommendations, he welcomes column critiques and comments at At the time of publication, he owned none of the equities mentioned in this article, but positions can change at any time.