Stock (Symbol)

Pepsico (PEP)

Stock Price

$113

Sector

Food & Necessities

Data is as of

May 7, 2017

Expected to Report

July 5

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

Pepsico (PEP) provides safe, steady total returns to investors that are similar to the stock market, but at a lower risk. That being said, I wouldn’t buy the stock up here at its highs. For most of the past decade shares of PEP have sold between 15 and 19 times earnings. But in 2013 the median P/E rose to between 19 and 22 — and 22 is the P/E now. With single-digit profit growth expected the next four qtrs, I think it would be best for investors to hold off and get in at a better price. Pepsico 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 0.70. Theoretically a 10% decline in the market will cause PEP to fall just 7%. Still, during the past decade the S&P 500 and PEP stock have both grown around 5% per year. Plus, the Pepsi has a higher yield than the S&P (3% to 2%). PEP has an Estimated Long-Term Growth Rate of 6% per year in addition to a 3% yield — for a hypothetical 9% estimated total return. The company has boosted its dividend each year since 1973, and already raised it 7% this year to $3.22 annually. Pepsi stock has provided its investors with (1) higher safety (2) a larger yield and (3) a better return than the stock market itself. But the stock is fairly valued now. I am looking to buy on a pullback I do buy in I will likely hold for years or maybe decades.

One Year Chart

Last qtr PEP beat the street for the 5th straight qtr, delivering 6% profit growth which beat the 2% estimate. Sales increased just 2%. Slow sales growth makes it unlikely this stock takes off and leaves would-be investors behind. Management estimates 2017’s profits of $5.09 which is 5% growth and slightly below analyst estimates (but analysts know PEP is beating estimates). Qtrly profit Estimates are 4%, 6%, 8% and 5%. P/E of 22 is fair.

Fair Value

Six to nine years ago the stock had a P/E between 15 and 17, but the stock market was cheap during that time. It isn’t anymore (nor is PEP). My Fair Value P/E of 22 is generous, and still the stock doesn’t have any upside. But if you already own the stock, it looks good to hang onto.

Bottom Line

Pepsico has been on a steady rise higher this past decade, growing 5% per year in addition to paying that nice 3% yield. But with the stock at its highs, I think its best to be patient and see if we can buy in a lower level. Still, this is one of the great long-term buy-and-hold stocks so if you already own it I would suggest sticking with it. PEP is on my radar for the Conservative Portfolio.