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.

So I way behind on my earnings analysis segments.  I'll try my best not to spout out the completely known information as best I can and keep these pointed and short.  

A couple weeks back, Pepsico announced their third quarter earnings results.  Core earnings were $1.35 on revenues of $16.3B.  This handily beat estimates of $1.26 and $16.15B, respectively.  While the earnings number looks great, it's to be noted revenues are actually down 5% from last year due to currency conversion issues.  Venezuela has become such an impact that they are changing the accounting methods on it, as the country looks to confiscate the assets.  All that said, Pepsico should be proud of their 7.4% organic revenue growth, 14% core earnings growth, and the increased guidance of 9% core earnings growth for the year.  Even in the US, snacks and beverages increased in volumes and revenues, while it's to be noted that carbonated beverages were down.  By having a diversified portfolio of beverages and snack, while also having the leadership to notice shifting trends and react such that their non-carbonated beverages are lifting performance so well is nothing to sneeze at.  In the Coke vs. Pepsi war, Pepsi is clearly winning, in business terms, right now.  

Wall street appears to agree with that thought process.  The company's stock has risen almost $7 since their earnings report, pushing near a new 52-week high.  With earnings expected to be around $4.54 this year, due to currency conversion, the stock is trading 22.6 times 2015 earnings.  The company is doing well, so lets say they can manage 9% earnings growth again next year, that puts next year's earnings at $4.95 and the current price multiple at 20.7.  Those are not cheap numbers, by any means.  At the same time, the price isn't ungodly awful on 2016 earnings, which the market is starting to leverage as their base for looking forward.  The stock is up over 10.7% in the course of the last month.  Don't be surprised if some form of rotation in the market takes this stock for a hit as traders take profits.  It's almost inevitable at this point.  

At this point, the company has a positive future in front of it, in regards to earnings and revenues.  The challenge it will continue to face is a market where interest rates start rising and industrial companies really start showing growth.  Because there seems to be evidence of a slowdown, staples are a safe haven - especially when they have this kind of growth in them.  As soon as that changes, the stock will get hit and we'll see multiple contraction.  

Finally come my estimates and rating.  I will stick in line with Pepsico with 2015 earnings of $4.54.  I'm also going to project a conservative 7% earnings growth for 2016, which would give earnings of $4.86.  While economic growth is anemic and there's less risk for a U.S. interest rate hike, the stock will maintain its favorable PE multiple of 22.  However, when risk of change gets introduced to the picture, I see a PE closer to 18 or 19 to be likely.  My updated 2015 price target is $100, my 2016 price target is $107 with the caveat of a market turn lowering that target to $90.  Given the current prices and targets, I have to lower my rating of the stock to a 3.  While I believe the company has long-term strength and prospects, I feel the price is ahead of itself and you cannot accumulate more until a decent pullback has happened.