Earnings 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.

Last week Pepsico kicked off the earnings season for my portfolio with the announcement of their third quarter earnings for 2016.  The results and quarter were rather impressive, with earnings of $1.37 on revenues of $16.03B.  Both numbers beat respective estimates of $1.32 and $15.83B.  In addition to these solid beats, we witnessed organic growth of 4.2% and core constant earnings growth of 7%.  Both excellent numbers given the global economic conditions we're seeing and has resulted in the company also increasing their core constant earnings growth for the year to $4.78.  

The management team continues to do an excellent job.  They're continuing to get more efficient and that leverage is turning into higher profits.  Snacks and beverages are improving world-wide and the consumer appears to be getting stronger.  CEO Indra Nooyi commented on the conference call about how just about the entire world seems to be getting better.  She called out each of the major regions, speaking to how each is either getting better, or in a few cases, how things aren't getting any worse.  Next quarter you won't see as much gross margin improvements as we have, due to commodity hedging benefits wearing off.  Additionally, while everything sounds rosy, the company is still earning less on a year over year basis, mostly due to foreign exchange impacts and the deconsolidation (their word, not mine) of the Venezuela assets.  All in all though, these are pretty impressive results and you could hear similar thoughts from analysts on the call.

I continue to believe in Pepsico's management and their ability to execute, as they continue to be one of the best packaged goods companies in the market.  It appears that their growth is starting to accelerate as the US economy, and maybe the world's, starts to show signs of stabilization and recovery.  This trend likely continues into the next year, however, there will be stock market specific headwinds to watch out for.  As rates rise (and it's a matter of when, not if), you will see pressure on a stock like this.  For now, I think we'll continue to see some support when it yields 3% when it sells off.  The 2016 earnings target is now at 4.78.  I'm predicting a 8% growth of those earnings next year which gives a 2017 target of $5.16.  I am lowering the multiple expectations from the current 22+ range down to 20 times, though.  Considering the company appears to be one of the best CPG companies, this is probably rather conservative, as they deserve a higher premium than other companies, but it factors in the market risks for higher rates and how institutions will react to that, more so than the stock's performance.  This leaves a price target of $103.25, but an upper range is realistically around $113.50, so I maintain a ranking of 2 for the stock as I believe it will continue to grow, but do expect the price appreciation to slow over the coming years.

Nothing on this site should be taken as advice, research, or an invitation to buy or sell any securities.  All views expressed are solely of my own and I am not a professional money manager.  Please consult with your financial adviser before taking any action in your own portfolio.