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.
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.
|Operating Cash Flow||9.87B||10.63B||843.00M|
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|
At $81.20, Pepsi is trading below its 50-day SMA, but above its 200-day SMA.
E = Equity to Debt Ratio Is Weak
The debt-to-equity ratio for Pepsi is weaker than the industry average of 0.60. However, it’s likely to improve going forward.
E = Earnings Had Been Steady
Earnings had been steady on an annual basis until 2012. But earnings are an easy fix for a company like Pepsi. The real concern is the top line.
|Revenue ($) 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?
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.
As always, Pepsi is a long-term OUTPERFORM.
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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.