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.

On Wednesday, Pepsico announced their fourth quarter and fiscal year financial results for 2014.  The company did an excellent job of beating expectations on the fourth quarter by generating $1.12 of earnings on $19.95B in revenues.  Both numbers handily beat wall street expectations of $1.08 EPS and $19.66B in revenues.  I made a mistake in my weekly summary, stating I was looking for high digit organic growth - that was supposed to be earnings growth.  Earnings grew 7% from the same quarter a year ago, and 9% on the annual numbers.  Going into the call, the biggest concerns were foreign exchange impacts, business in Russia and Venezuela (which accounts for about 11% of revenues), and future guidance.  Foreign exchange was an impact, and was basically in line with expectations, meaning it was already priced in.  Business in Russia, despite current events, appears to be holding well.  Prices are being increased with inflation, and since their primary goods for this area are milks and juices, they're something people continue to buy.  Venezuela is seeing impacts, and there's more currency exchange risks on the forefront, as more government announcements have been made, but the details haven't been published as of yet.  It's also important to note that sales in Mexico declined some, but in line with company expectations, due to the government's application of a "fat tax." for certain goods.  Finally, there was a pleasant surprise coming out of the North America Beverages division, which entailed not only a slowing in the decrease of revenues, but a 3% organic increase.  Volumes continued to decrease (a result from people being more health-minded), indicating that they were able to apply price increases.  This is a significant change from the past and likely a result of a strengthening economy and/or a result of lower gas prices.

Guidance for 2015 was respectable and in line with my expectations of 7% or higher core constant growth.  This will be based off of their 2014 results of $4.63.  Organic revenue growth is expected to be around 5% and they expect to return $8.5 to 9 Billion in cash to shareholders this year, which is in line to slightly more than they did in 2014.  The interesting thing to note is that under current expectations, foreign exchange impacts will be a negative 7% for both revenues and core EPS and if the new Venezuelan details come out, it could be more.  The exchange rates are clearly a headwind and a risk, but also show what the company is capable of.

The company has provided another solid year, and expectations are respectable for 2015.  They've clearly established themselves as one of the best companies in the industry and deserve to be priced as such, so I will give them a 22 multiple.  I want to urge some caution with that multiple, because it makes the valuation a little rich under current conditions and prices, as the 10 year average P/E ratio is about 20.7.  The current yield is also at 2.64% and there will be another increase in June.  As long as the 10-year treasury rate stays as low as it is, this stock will continue to receive its high valuations.  As the stock price increases, we're going to need to see signs of accelerated growth/expansion in the company - better than expected revenues, increased margins, etc for us to find reasons for the valuation to be justified.  Based on prices and guidance, I'm going to set my 2015 earnings to be at $4.95.  With the multiple I'm giving, it sets the stock's price target at $110.  I am a little nervous about that target and will continue to keep a close eye on the macro environment as well as how the company and the stock performs.