Will Pepsi Be Salty or Sweet for Investors?

With shares of Pepsico (NYSE:PEP) trading at around $81.20, 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:

C = Catalyst for the Stock’s Movement

There are two main themes for the Pepsi story.

One, it’s going to move more towards snacks in the future. This has a lot to do with a health-conscious society that is moving away from soda. There are also rumors that a tax could be imposed on sodas. This would be downright absurd. The problem is that most stores now sell larger sizes of soda. This helps sales, but it also leads to bad habits. If more 8 oz. sodas were on the shelves, or in those little refrigerators you see prior to checking out at a retail store, then the health concerns wouldn’t be as broad. Consuming too much of anything is a bad idea, and there is too much sugar in a 20oz. soda, especially considering humans shouldn’t consume more than 40 grams of sugar in one day. The irony here is that snacks aren’t exactly healthy, either. However, the problem with most snacks is calories, not sugar. Pepsi does offer healthy snacks as well, including Quaker products and yogurt. Pepsi is now expanding its yogurt operation.

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The other theme for Pepsi is emerging markets. With incomes growing in emerging markets, there is more discretionary income available for consumers to spend on Pepsi products. Another big plus is that competition in these markets is limited. Pepsi’s market share in emerging markets is expected to grow as high as the low double-digits. One concern here is the health of the global economy.

Pepsi is a well-managed company, and it’s highly focused on cast savings. This is a company that’s always looking to improve the bottom line. For example, Pepsi is using strategic agricultural and packaging techniques that will cut costs.

In regards to top-line growth, Pepsi is expanding its marketing to increase exposure for existing products, and it’s always looking for great acquisition opportunities.

Yet another positive is that Pepsi consistently returns capital to shareholders via dividends and buybacks. In regards to dividends, Pepsi currently yields 2.80 percent. The Coca-Cola Company (NYSE:KO) also yields 2.80 percent, and Dr Pepper Snapple Group (NYSE:DPS) yields 3.30 percent. This doesn’t mean Dr Pepper Snapple is the best option of the three. It has underperformed Pepsi and Coke over the past three years. It’s also not as resilient as Pepsi and Coke in bear markets. For example, Dr Pepper declined approximately 50 percent in late 2008/early 2009 whereas Pepsi and Coke declined approximately 30 percent.

Getting back to Pepsi, there are several other positives to consider:

  • Strong brand portfolio
  • Geographic diversity
  • Solid cash flow

Revenue and earnings declined last year after several years of consistent gains. This is concerning, especially the revenue. Earnings can be improved using many different tactics. The good news in regards to revenue is that there was a year-over-year increase last quarter.

The chart below compares fundamentals for Pepsi, Coke, and Dr Pepper.

PEP KO DPS
Trailing P/E 20.80 21.27 15.50
Forward P/E 16.99 17.37 13.96
Profit Margin 9.33% 18.19% 10.53%
ROE 27.15% 26.59% 28.14%
Operating Cash Flow 9.87B 10.63B 843.00M
Dividend Yield 2.80% 2.80% 3.30%
Short Position 0.80% 0.90% 3.90%

Let’s take a look at some more important numbers prior to forming an opinion on this stock.

T = Technicals Are Mixed

Pepsi has been a steady performer for not just years, but decades. However, the last month has been disappointing.

1 Month Year-To-Date 1 Year 3 Year
PEP -1.28% 20.35% 24.79% 44.78%
KO -3.76% 12.95% 14.11% 72.86%
DPS -5.51% 6.14% 17.50% 39.75%

At $81.20, Pepsi is trading below its 50-day SMA, but above its 200-day SMA.

50-Day SMA 82.48
200-Day SMA 75.80
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E = Equity to Debt Ratio Is Weak

The debt-to-equity ratio for Pepsi is weaker than the industry average of 0.60.  However, it’s likely to improve going forward.

Debt-To-Equity Cash Long-Term Debt
PEP 1.31 7.01B 29.40B
KO 1.07 18.44B 35.12B
DPS 1.25 220.00M 2.80B

E = Earnings Had Been Steady

Earnings had been steady on an annual basis until 2012. But earnings are an easy fix for a company like Pepsi. The real concern is the top line.

Fiscal Year 2008 2009 2010 2011 2012
Revenue ($) in millions 43,251 43,232 57,838 66,504 65,492
Diluted EPS ($) 3.21 3.77 3.91 4.03 3.92

Looking at the last quarter on a year-over-year basis, revenue improved and earnings declined. This should be looked at as more of a positive than a negative.

Quarter Mar. 31, 2012 Jun. 30, 2012 Sep. 30, 2012 Dec. 31, 2012 Mar. 31, 2013
Revenue ($) in millions 12,428 16,458 16,652 19,954 12,581
Diluted EPS ($) 0.71 0.94 1.21 1.06 0.69

Now let’s take a look at the next page for the Conclusion. Is this stock an OUTPERFORM, a WAIT AND SEE, or a STAY AWAY?

Conclusion

Pepsi has been a steady winner for decades. This trend is likely to continue. Even if the stock gets slammed, it should present an opportunity to buy more at discounted prices. The generous yield would also help ease the pain a little.

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As always, Pepsi is a long-term OUTPERFORM.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — click here and get our CHEAT SHEET stock picks now.

All content posted should not be considered professional advice. Please do your own research and consult with a professional financial advisor before making any investment decisions. I don’t have any positions in this stock.

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