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Note: I use the Stock Selection Guide Software and its methodologies from the CSA to perform the bulk of my analysis on stocks. This is not a recommendation to buy a stock – it is my analysis only. Please do your own research.
Although I tend to prefer Coke products, I must admit that I do frequently partake in Pepsi products – not just the soft drinks but also the potato chips and the oatmeal I eat for breakfast. As I own Coca-Cola in my dividend portfolio, I like to look at Pepsi from time to time to see if I should also be adding this one!
Company Profile:
From MSN Money:
PepsiCo, Inc. (PepsiCo) is a global snack and beverage company. PepsiCo manufactures, markets and sells a variety of salty, sweet and grain-based snacks, carbonated and non-carbonated beverages and foods. It has four divisions: Frito-Lay North America, PepsiCo Beverages North America, PepsiCo International and Quaker Foods North America.
Revenue and EPS Graph
Click to EnlargeSummary:
PEP’s revenue profile is not a spectacular uptrend that I typically like to see. In fact it was a bit choppy in 1996 through to 2001 as they tried to diversify into different businesses such as Pizza Hut and KFC. The last few years have been a bit better in terms of consistency but the overall revenue picture is not great with a historical compound growth rate for revenue of only 3.6%. Given, Pepsi is a huge company but I would rather see revenues growing at least 5%. That being said, I took a more aggressive stance on projecting revenue growth due to this recent performance. I have estimated revenue growth at 8% which means that revenues in 2011 are projected at $51,628 (m).
The earnings picture is a much more favorable, especially since 1999. The 10 year historical growth rate has been 10.8%. If it were not for the period from 1996 to 1999, the earnings picture would be spectacular. However, I am encourage by this more recent performance and am estimating PEP to grow earnings at a rate of 7.9% over the next 5 years. My projected earnings per share amount in 2011 is $4.37.
Dividends
Click to EnlargeSummary:
From 1997 to 2003 Pepsi’s dividend increase track record was steady by very slow. Then in 2003 the company put the peddle to the metal and dividend increases skyrocketed. I want to see the company provide these current dividend increases over the next couple of years before I get too comfortable with the company.
The current dividend yield of 1.99% is high compared to its 10 year historical average dividend yield of 1.6%. As I like to see current dividend yields higher than the 10 year average this is a positive indicator. The yield for PEP is slightly lower than the yield on the S&P 500 Index, which is currently at 2.00%. I would rather see a stock’s dividend yield to be significantly higher than SPY’s.
Valuation
Click to EnlargeSummary:
The stock selection guide allows an investor to come up with a valuation range for the stock based on historical prices, dividend returns, historical share price returns, and risk. It does this through formula that determines an upside and downside price (return / risk) for the stock. My inputs for the stock are as follows:
Revenue Growth Rate: 8%
EPS Growth Rate: 7.9%
Projected Upside P/E: 22.0
Dividend Return: 1.6%
Relative P/E: 0.93 (indicated the stock is slightly lower than historical averages)
Provision for a decline in the current stock price: 20%
Based on these inputs and the analysis completed by the software, my buy zone for the stock is $60.00 to $72.05. Given the current share price of $75.92 on November 27, 2007, I do not consider PEP to be a buy.
Disclosure: The Dividend Guy does not own shares in PEP. This is my analysis of the stock and is not investment advice. Do your own research.
I would not hesitate to buy PEP if it was under pressure, but currently this stock is in the statosphere with PG CL and KO when it comes to valuation.
I think it is correct to say that PEP is certainly not a cheap stock at this point, but I do think for the long run it is a great stock to own. Management is doing extremely well with executing their growth strategy.
Pepsi’s management is re-orging for the future through international sales. The company is growing faster then KO. KO is trading at at PE of 27. PEP at 20.5. I would take PEP up to $100.
I agree that PEP is overvalued. Investors ought not fall into the ‘value trap.’ That is, given “historical P/E” a stock might be undervalued. For example: Your input: “Relative P/E: 0.93 (indicated the stock is slightly lower than historical averages).” If growth rate is slowing–such as in maturing markets–historical P/E comparisons are irrelevant, for forward P/E multiple is destined to contract.
But thanks for the analysis!
Regards,
David J Phillips, Publisher
http://www.10Qdetective.blogspot.com