Is Pepsi Poised to Head Higher?

With shares of Pepsi (NYSE:PEP) trading around $84, is PEP an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let’s analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Pepsi operates as a food and beverage company worldwide. The company is organized into four business units: PepsiCo Americas Foods; PepsiCo Americas Beverages; PepsiCo Europe; and PepsiCo Asia, Middle East, and Africa. It manufactures, markets, and sells a range of salty, convenient, sweet, and grain-based snacks; carbonated and non-carbonated beverages; dairy products; and other foods. Convenience foods are seeing significant demand worldwide as consumers in growing economies are opting for these products. Pepsi stands to see a continued rise in profits for many years as a leading provider of quick, convenient, inexpensive, and enjoyable products worldwide.

PepsiCo is partnering with Senomyx, an American biotechnology company, as the two parties plan to collaborate on Senomyx’s Salt Taste Program. Senomyx announced the new partnership on Wednesday via PR Newswire and explained that under the new agreement, Pepsi will provide research funding for the Salt Taste Program for 2014 and in return, earn non-exclusive rights to salt flavor modifiers discovered during the research funding period. Senomyx will also have the right to supply these flavor ingredients directly to Pepsi. Senomyx is a company that uses proprietary taste science technologies to discover, develop, and commercialize novel flavor ingredients for the food and beverage industries, and, as highlighted by PR Newswire, it is currently working to identify flavors with modifying properties intended to restore the desired salty taste in products with reduced salt.

The U.S. Centers for Disease Control and Prevention said time and time again that Americans consume too much salt, so now the biotech company is working to find a way to introduce new flavor modifiers that appeal to people’s salt tooth but don’t put their health at risk. That kind of research is expensive, and that’s where Pepsi will come in. If Senomyx can come up with an alternative that gives food and beverages a salty taste but is actually devoid of the chemical itself, the biotech company could be in luck, and considering the fact that Pepsi now has non-exclusive rights to the modifiers, it could be, too. John Poyhonen, president and CEO of Senomyx, said in a statement, “We are pleased to establish this new type of research agreement, which provides research funding to Senomyx while retaining our ability to add potential new flavor offerings to our direct sales portfolio.”

T = Technicals on the Stock Chart are Strong

Pepsi stock has been in a range over the last couple of quarters. However, the stock is currently surging higher and looks poised to continue. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Pepsi is trading above its rising key averages which signal neutral to bullish price action in the near-term.

PEP

Source: Thinkorswim

Taking a look at the implied volatility (red) and implied volatility skew levels of Pepsi options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Pepsi options

15.48%

3%

0%

What does this mean? This means that investors or traders are buying a small amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

May Options

Flat

Average

June Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a small amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Pepsi’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Pepsi look like and more importantly, how did the markets like these numbers?

2013 Q4

2013 Q3

2013 Q2

2013 Q1

Earnings Growth (Y-O-Y)

5.66%

1.65%

36.17%

-2.82%

Revenue Growth (Y-O-Y)

0.82%

1.54%

2.12%

1.23%

Earnings Reaction

-2.20%

2.07%

-0.64%

3.04%

Pepsi has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been pleased with Pepsi’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

How has Pepsi stock done relative to its peers, Coca-Cola (NYSE:KO), Dr Pepper Snapple (NYSE:DPS), Monster Beverage (NASDAQ:MNST), and sector?

Pepsi

Coca-Cola

Dr Pepper Snapple

Monster Beverage

Sector

Year-to-Date Return

1.65%

-5.28%

7.68%

-3.54%

1.12%

Pepsi has been a relative performance leader, year-to-date.

Conclusion

Pepsi provides convenient and affordable beverage and food items to consumers in a multitude of countries around the world. The company is partnering with Senomyx as the two parties plan to collaborate on Senomyx’s Salt Taste Program. The stock has been in a range over the last couple of quarters, but is currently surging higher. Over the last four quarters, earnings and revenues have been rising, which has left investors pleased about earnings announcements. Relative to its peers and sector, Pepsi has been a year-to-date performance leader. Look for Pepsi to OUTPERFORM.

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