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Pepsico Has Delivered Better Returns With Less Risk

Stock (Symbol)

Pepsico (PEP)

Stock Price

$112

Sector
Food & Necessities
Data is as of
March 30, 2017
Expected to Report
Apr 17 – 21
Company Description
PepsiCo, Inc. is a food and beverage company. The Company, through its operations, bottlers, contract manufacturers and other third parties, is engaged in making, marketing, distributing and selling a range of beverages, foods and snacks, serving in over 200 countries and territories.Pepsico’s brands include Agusha, Amp Energy, Aquafina, Aquafina Flavorsplash, Aunt Jemima, Cap’n Crunch, Cheetos, Chester’s, Chipsy, Chudo, Cracker Jack, Diet Pepsi, Diet Sierra Mist and Domik v Derevne. Source: Thomson Financial
Sharek’s Take
David SharekPepsi (PEP) has great worldwide brands such as Pepsi, Lays, Tropicana, Quaker and Gatorade. But what really makes Pepsi special is the stock has provided investors with returns similar to the stock market, with less risk. The stock market’s Beta is 1.00. PEP’s Beta is just 0.59 on Google and 0.70 on Yahoo Finance. Thus, theoretically a 10% swing in the market will move PEP stock around 6-7%. Still, during the past decade the S&P 500 has grown around 5% per year, PEP has grown 6% per year. Plus, the S&P has a yield of 2%, Pepsi’s is 3%. So essentially Pepsi stock has provided its investors with (1) higher safety (2) a larger yield and (3) a better return than the stock market itself. PEP has an Estimated Long-Term Growth Rate of 6% per year in addition to a 3% yield. The company has boosted its dividend each year since 1973, and already raised it 7% this year to $3.22 annually. This stock currently has a P/E of 22 which is fair considering the safety is high and the fact the company has beaten profit estimates the last 4 qtrs. With this stock at its highs, I am looking to buy in but only if PEP declined to around $105 or so. My 2017 Fair Value is $113 which is oh-so-close to the current $112 price. But once I buy in I will likely hold for years or perhaps decades.
One Year Chart
Last qtr Pepsico delivered revenue growth of 5% and profit growth of 15% which beat the 9% estimate. That was the 4th straight earnings beat and I have to think the company is delivering faster growth than we think. That being said, management lowered 2017’s profit growth estimate from 8% to 6% (probably to make it easier to keep beating). Qtrly profit Estimates are 2%, 8%, 6% and 6%. P/E of 22 is fair.
Fair Value
I’m disappointed this stock isn’t cheaper. Six to nine years ago the stock had a P/E between 15 and 17. But during that time the stock market was cheap. Not anymore. With Pepsico beating the street I feel the stock should have a P/E higher than normal, and have my Fair Value at 22x earnings. That makes the stock fairly valued right now.
Bottom Line
Pepsico is a fantastic stock that most conservative investors aren’t aware of. It’s amazing to me this stock has delivered market returns while having much less risk than the market itself. But today the stock is rich and although I would love to add it to my Conservative Portfolio, I will hold off and hope the stock comes down to around $105 so I can get in. 
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