PepsiCo’s (NYSE:PEP) stock price has surged around 20 percent since the beginning of January. With that being said, let’s use relevant sections of our CHEAT SHEET investing framework to decide whether Pepsi is an OUTPERFORM, WAIT AND SEE, or STAY AWAY.
C = Catalysts for the Stock’s Movement
PepsiCo’s first-quarter earnings announcement in April helped bolster its stock price. The company announced an EPS of $0.77, an increase of 12 percent from last year. The company said it expects to return $6.4 billion to shareholders through dividends and share repurchases in the coming year. Pepsi will announce its second-quarter earnings on July 24.
Pepsi has focused on growing its dividend, which has increased 13.6 percent each year since 2002. This translates into the dividend doubling every five years. The company recently announced its forty first consecutive annual dividend increase to $0.57. This dividend yield is right in line with Coca-Cola’s (NYSE:KO) at around 2.7 percent. With a payout ratio of 55 percent, Pepsi still has room to grow its dividend.
Pepsi’s management team has changed its strategic focus in the past few years from carbonated beverages to snacks. The flat (pun intended) growth in soda consumption helps explain why the company’s earnings per share have hovered around $4.00 since 2009. While Coca-Cola leads the pack in beverage sales, Pepsi is the leader in the snack market. Pepsi has capitalized on the increasing importance consumers place on health and wellness by focusing on expanding its Good-For-You portfolio that includes brands like Quaker Oats and Izze sparkling juices.
E = Exceptional Performance Relative to Its Peers?
Pepsi and Coca-Cola have what is essentially a duopoly in the soda and snack industry, so it makes sense that their key metrics virtually mirror one another. From a relative valuation perspective, it seems that Pepsi is slightly less expensive than Coke with a trailing P/E of 20.53. Additionally, Coca-Cola posted negative revenue growth last quarter as international soda consumption declined.
Coca-Cola’s debt-to-equity ratio is slightly stronger than Pepsi’s. Pepsi’s relatively higher debt-to-equity ratio results from its acquisition of Pepsi Bottling Group and Pepsi Americas, in which the company acquired the two bottlers by taking on around $20 billion more in debt. Pepsi has a very low chance of defaulting on its debt and has enjoyed low interest rates. The synergies achieved from purchasing the bottlers should more than offset the interest expense from issuing the debt.
|Debt to Equity||1.30||1.08|
|Return on Equity||27.15%||26.59%|
|Qtrly. Revenue Growth||1.2%||-0.9%|
T = Technicals are Mixed
Pepsi is currently trading at $80.20 — above its 200-day moving average of $76.75, but slightly below its 50-day moving average of $82.27. Pepsi is experiencing a longer-term uptrend, but the share price has been volatile. The stock experienced a double top — two consecutive peaks of $84 with a shallow trough in between — in April and May. Those trading on technicals should be wary of this pattern — a double top sometimes signals the beginning of a reversal period.
Pepsi is a solid option for an investor looking to add a low-risk stock with an attractive dividend policy. Pepsi’s beta is very low at 0.33, implying that the company has low systematic risk; therefore, if the economy falters in the coming months due to reduced U.S. Federal Reserve stimulus, the company will be relatively unaffected.
CEO Indra Nooyi has done a fair job managing the company since taking the reins from Steve Reinemund in 2006. Pepsi’s Good-For-You portfolio continues to expand as the company capitalizes on emerging trends in the health and wellness market. Additionally, the company has benefitted from synergies emerging from its acquisition of two major bottlers — Pepsi Bottling Group and Pepsi Americas in 2010. Investors looking to add a stable food and beverage giant with a growing dividend will find Pepsi to be an OUTPERFORM.
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