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Pepsico Shows Why Growth is Better Than Value

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Stock (Symbol)

Pepsico (PEP)

Stock Price

$116

Sector
Food & Necessities
Data is as of
August 2, 2017
Expected to Report
Sept 27
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 SharekGrowth Stocks outperforming Value Stocks was the big story in the stock market this past weekend, with many pundits predicting a reversal of fortune. But I feel value stocks are fairly valued and don’t have as much upside as growth stocks do. Pepsico (PEP) is a perfect example of this. PEP provides investors safe, steady total returns to investors that are similar to the stock market, but at a lower risk. The stock has grown 5% a year the past decade, while delivering a 3% yield for a total annual return of 8% per year. PEP’s Beta, which is a measure of risk or volatility, is 0.70 which is less than the S&P 500’s Beta of 1.00. PEP has delivered stock-market-like returns with less risk. The negative is the stock has a P/E of 22, which is at the high-end of its ten-year range of 15-22. I don’t feel PEP’s P/E can or will rise, thus the most I expect out of this stock is 6-8% growth per year plus a 3% yield. And again, you have to buy in at the highs to get that. 22x earnings — that’s not a “value” to me as I can get 15% growers for that price. But on the bright side, the lower U.S. dollar is falling and since Pepsico’s brands are in more than 200 countries, profits could come in above expectations. Management targets 8% “constant core constant currency EPS growth” for 2017 and forecasts a -2% impact from F/X, which would mean 6% profit growth (which is what analysts also expect). Maybe profits grow 8% this year but you still have to pay 22x earnings for the stock, which is high. Pepsico has great worldwide brands such as Pepsi, Lays, Tropicana, Quaker and Gatorade, and most of its brands occupy the #1 and #2 spots in their respective categories. The company has boosted its dividend each year since 1973, and already raised it 7% this year to $3.22 annually. This value stock is fully valued here, and is a great example why it’s better to be in growth stocks at this time.
One Year Chart
Last qtr PEP beat the street for the 6th straight qtr, and delivered 7% profit growth vs. estimates of 4%. Sales increased 2%. 2017 estimates increased slightly from $5.14 to $5.16. Qtrly profit Estimates are 2%, 8%, 5% and 9%. P/E of 22 is at the high end of PEP’s range, but is fair as interest rates are low.
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, continue to hold.
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 P/E at its highs, I don’t see much upsie. Honestly, there’s a lot of value stocks that provide high single-digit profit growth and have P/Es of 20 or more. That in no way signals to me a pendulum ready to swing in the other direction. Value stocks are values when the P/Es are 12 to 14. PEP is on my radar for the Conservative Portfolio, I need a better price to climb aboard.
Power Rankings
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David Sharek David Sharek is stock portfolio manager and CEO of DavidSharek.com. David believes a company's profits ultimately drive the price of its stock. His book The School of Hard Stocks can be found on Amazon.com.