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.  Ratings are based upon 12-18 month outlook on stock direction and not necessarily related to moves I make due to financial positioning.

Today Pepsi announced their third quarter earnings results and they were quite strong.  Earnings beat estimates, coming in at $1.36 while revenues also grew more than expected, coming in at $17.2B.  On top of that, they delivered the icing on the cake by increasing their 2014 estimates to 8% EPS growth on the year.  Included in this was a 45 basis point increase in margins.  All of this in the middle of what CEO Indra Nooyi calls a "challenging macro environment."  

There wasn't much for bad news that you could pull from the call.  Yes, there are signs of economic pressures globally, but that hasn't really shown itself in revenues from those regions as international growth was around 8%.  We know the dollar conversion is an impact by 3-4% but this isn't surprising anyone and despite this, guidance on the year was still increased.  They also continue to maintain the high single digit earnings growth prospects looking forward.  This leaves the stock itself as a risk as well as a change in what stocks institutions want to buy.  Right now Pepsico yields 2.79%.  This isn't big, but it's more than the 2.3% the 10 year treasury is at right now and that appears to be decreasing for now, not increasing.  The final concern is going to be that the stock is over valued.  Right now, the stock is sitting at 20.5 times 2014 earnings and 19.1 times my 2015 estimate of $4.90 earnings.  It's hard to say that this stock isn't near nose bleed territories.  But given the current economic conditions world-wide, people are looking for safety and performance.  Pepsi has that in spades.  Should interest rates turn around and/or the global economy start to improve, you'll see a rotation out of safety stocks and that's when I believe PEP becomes a risk.  That's likely to be a 2015 story.  For now, seeing food and beverage stocks at 22 times earnings isn't unheard of.  In fact, key competitor Coca Cola is sitting around there right now despite Pepsico's clear out performance.  As such, I feel comfortable for the next few months.

As I've stated, I've placed my 2015 earnings estimates at $4.90.  I expect the stock to maintain it's roughly 20 multiple so my target price is $98.  This is about 5% higher than it is today.  I keep the stock ranked at a 2 for now as I see a respectable floor at the 88 - 90 range, in the event the stock pulls back.  That being said, my cost basis for this stock is way too low.  I do not intend to buy any more shares at this time and become much more likely to sell as we approach the target price - particularly if we see the global economic or interest changes I've already mentioned.