Monday, February 17, 2014

Stock Analysis: Pepsico (PEP)

Notes:
Stock Ratings: 1 = buy at current stock prices, 2 = buy on a 5-10% dip in stock price, 3 = sell on a 5-10% increase in stock price, 4 = sell at current stock prices to raise cash

As I'm sure anyone can guess, Pepsico is the parent company to the Pepsi brand of soft drinks.  Additionally, they also are the parent company of brands such as Lays potato chips, Tropicana juices, Quaker Oats, Mountain Dew, Aquafina bottled water, Gatorade sports drinks, and many other global and regional brands of consumer goods.  It is the number 2 soft drink maker to Coca Cola, and one of the most notable snacks makers in the world.  Pepsi is behind Coke in it's global distribution which is providing an opportunity for larger growth.  The company is led by a strong and reliable CEO by the name of Indra Nooyi.  Since I've started following this company over 3 years ago, she was at the front of recognizing the challenges of a culture that is quickly shifting to healthier eating and has been positioning the company to account for this without hurting its trademark brands and loyal customers.  This challenge continues as Pepsico moves into the years to come.

Past Year:
On Thursday, Pepsico announced their fourth quarter and fiscal year results.  The overall year results were in line to better than expected.  Organic growth was in line, earnings were a 2% beat, cost cutting slightly exceeded expectations, and cash flow was dramatically increased.  For the quarter, they basically met expectations over all.  As for stock performance in the last year, PEP provided a 21.2% return against the S&P's 29.69% and the 24.76% of the Consumer Packaging Group's sector (measured by the XLP).  So, although strong, Pepsi's stock under performed the market.  Truthfully, that's to be expected when you have a strong bull year like last year.  Companies tend to shine at times when the market is bearish and working towards turning around.  It's their safe and steady nature, plus solid dividend yields that attract people during the difficult times and the same thing many run from when the market is charged and growing.  

2014 Prognostication:
In their presentation, Pepsi stated they estimate a 7% earnings increase for 2014, which I believe is reasonable and in line to my own expectations.  They will continue to fight the fact that colas are under pressure in North America, and recent turmoil in varying emerging markets which Pepsico plays in could prove to be a small challenge in exceeding those expectations.  With the debt ceiling delayed again, I don't see any big event to cause the market to pull back significantly and therefore the safe stocks aren't as likely to be in high demand either.  You take that and combine it with the message delivered on Thursday stating they will not split the company into separate entities to represent snacks and beverages and you have a stock where people are running for the exits, despite a increase in the dividend, which seems exceptionally safe.  Based on estimated earnings and maintaining the roughly 18 times earnings ratio this stock tends to get, and you get a $81 price target.  As of now, the stock isn't even 5% below that mark.  In contrast, the stock has plummeted through its 200 day moving average and doesn't show signs of being oversold yet.  My guess is that the first level of support would be around the time the stock reaches a 3.5% dividend yield, which is near $75, another 4% down from current prices.  Pepsi didn't just announce a dividend increase, but rather increases return to shareholders by 35%, which means they have a bit of ammo to start buying stock, if they choose.  Between those 2 things, I don't see this stock to be one of wild swings this year.  Instead, I anticipate leveling around the mid 70s and slow growth back to more normal prices once everyone who was betting on a spin-off is out of the market.

My Stock Ownership Plans:
As mentioned earlier, I've owned stock in Pepsi for around 3 years now.  I had sold out of much of my position by early year last year, regretting it every step of the way as the stock continued to go higher.  This stock is a key ingredient to keeping my portfolio diversified, and therefore am willing to let it under perform the market a little in the name of it protecting my portfolio in bad times.  That being said, knowing the trend we're currently in, I intend to keep this stock an underweight position while the economy appears to be turning around to a growth engine - even if it is a slow turn around.  This stock is currently 7.8% of my total portfolio.  My price target is currently $81 and I'd start increasing my position around the $75-76 range.  As such, the stock is essentially ranked at a 2.5, as I would buy or sell this in a rather tight range.