$PEP – Pepsi Co. Stock Analysis:
$PEP – Pepsi Co. is a leading global food and beverage company. Pepsi has a large portfolio of brands, with some of their biggest being Frito-Lay, Gatorade, Pepsi-Cola, Tropicana, and Quaker.
Pepsi makes, markets, distributes, and sells their various products in over 200 countries worldwide, which can be found in grocery stores, convenience stores, discount stores, e-commerce retailers, and membership stores (ie. Costco, Sam’s Club). Some of these products include dips, snacks, tortillas, chips (corn, potato, tortilla), cereal, oatmeal, rice cakes, beverages, beverage concentrates, and beverage syrups.
Recent SEC Filings:
In this section, I will summarize Pepsi’s 7 most recent SEC filings to help you get an idea of what is currently going on in their business.
- The board of directors elected Edith W. Cooper as an audit committee member (effective Sept. 1st 2021)
- Cooper (59) has 2 decades of experience at Goldman Sachs, most recently serving as the Executive VP and Head of Global Human Capital Management.
- Comes with an initial stock reward of 1,000 shares (granted on September 1st 2021), and an annual equity award of $15,833 worth of Pepsi stock (105 shares using todays value of $151).
- Pepsi “redeemed” their 1.7% Senior Notes due 2021
- This means that Pepsi paid off their final bond payment on these notes (Coupon + Principal), and these notes are taken off their books. (paying their bond payments on time indicates financial health)
- David Flavel (Pepsi Co Executive VP) purchased 2,000 shares of $PEP stock for an average price of $154.39, resulting in a total expenditure of $308,780.
- This purchase was made on August 6th 2021, bringing his total amount of shares owned to 30,811
- PepsiCo raised their Full-Year Guidance in their most recent 10-Q filing
- Increased their revenue growth estimate from 6% to 8%
- Maintained their EPS growth estimate at 11%
- Completed their $106M share repurchase program for 2021.
In order to undergo the comparable analysis, we need to get an idea of their closest competitors. These competitors must operate in the same space, operate in similar geographies, be of similar market cap, and have valid financial ratios. Using this criterion, I cam up with the following.
- $KO – Coca-Cola: Coca-Cola is a beverage (water, sports drink, juice, dairy, tea/coffee, concentrates, syrups, and energy drinks) company that manufactures, markets and sells their beverages to their customers worldwide. Coca-Cola is Pepsi closest competitor in terms of general operations and relative size.
- $MNST – Monster Beverages: Monster beverages develops, markets, and sells their energy drink beverages and concentrates to their customers worldwide. Monster sells their products to grocery chains, wholesalers, membership stores, convenience stores, drug stores, value stores, and e-commerce retailers.
- $KDP: Keurig Dr Pepper: Keurig Dr Pepper operates as a beverage company domestically and internationally. The Keurig side of their business pertains to the manufacturing, and selling of their coffee systems, packaged beverages, and beverage concentrates. The Dr. Pepper side of their business involves the manufacturing, and selling of their various beverage brands, beverage concentrates, vegetable juices, and water.
- $FIZZ – National Beverage: National Beverage develops, produces, markets, and sells their waters, juices, energy drinks, and soft drinks in the USA and Canada.
- Yearly Financial Performance (Good): In 2020, Pepsi increased their net revenues by 5%, and their gross profit by 4%.
- Yearly Financial Performance (Bad): In 2020, Pepsi’s operating profit decreased by 2%, their cost of goods sold increased by 5.5%, their net income decreased by 3%, and their EPS decreased by 2%.
- Q3 2021 Financial Performance (Good): In Q3 2021, Pepsi increased their net revenues by 12%, increased their gross profit by 5%, and their net income (before tax) by 7%.
- Q3 2021 Financial Performance (Bad): In Q3 2021, Pepsi increased their cost of goods sold by 15% (more than the increase in net revenues, which leads to decreasing profit margins), decreased their net income by 3%, and held their Net income attributable to PepsiCo constant.
- Option Exercising: In 2020, approximately 4M common shares were exercised as part of option contracts. These 4M shares had a dilutionary effect of 0.3%.
- Share Repurchases: In 2020, Pepsi repurchased 15M common shares, which increase the value of each previously existing share by roughly 1%. Considering the hardships that many businesses faced during 2020, seeing Pepsi have a net shares outstanding decrease YoY is something to be excited about.
Comparable Analyses: (Spreadsheet found at the end of this analysis)
By comparing Pepsi’s financial ratios to that of their publicly listed competition (listed above in the “competitors” section) I found the following:
Based off of Pepsi’s ROE in comparison to their competitors, $PEP should be valued at $247/share, which would imply a share price increase of 63%. This is a little high, so I decided to take another comparable.
Pepsi’s D/E ratio (compared to their counterparts) indicates that their fair value is $60/share, which would translate into a downside risk of 61%. This is very low, so I decided to take another comparable into consideration.
Pepsi’s P/E ratio indicates that their fair value is $169/share, which would translate into an upside of 11%. This is the most realistic estimate of the 3 comparable analyses, however I decided to take the average of the three comparable analyses to have one comparable price target.
Based off of the above comparable analyses, I landed on one final (comparable) valuation of $158.64/share, which would imply an increase of 4.2%. This indicates that Pepsi is very close to their fair value.
DCF: (Visualization found at the end of this analysis)
By inputting the necessary data into my DCF model, it arrived at a fair valuation of $PEP stock of $149/share, whichb implies a potential downside risk to this investment of 2.5%. This is pretty close to the result as achieved in my comparable valuation, which indicates that Pepsi is sitting at/around their fair value.
Dividend Discount Model: (Visual at the end of this analysis)
My dividend discount model uses the current annual dividend amount in combination with Pepsi’s average annual dividend growth (over the past 3 years), and their WACC (as found in the DCF model). By using these metrics, I was able to find Pepsi’s fair value to be $162/share, which implies an upside of 6%. Once again this is very close to their current fair value, which indicates that Pepsi is a decent buy.
In order to provide simplicity, I wanted to come to one final, all-encompassing valuation for the $PEP stock. I did this through taking the average valuation of the Average Comparable, the DCF, and the Dividend Discount Model. By doing this I arrived at a price target for the $PEP stock of $156.44/share, which implies an upside of 2.5%.
My plan for an investment in the $PEP stock would go as follows:
- Enter into a position below the fair value $156/share.
- Hold long-term
- Re-evaluate the position as new data is released
- Re-Invest the dividends (if still holding).
- Supply Chain Disruptions: Many of the supplies and raw materials that Pepsi uses to make their products are sourced from countries that are experiencing some sorts of political instability, civil unrest, or poor economic conditions. Some of Pepsi’s raw materials are sourced from a single/few supplier(s) that may not be able to keep up with Pepsi’s demand. However, Pepsi has increased their guidance, which shows that they are expecting to continue their growth, and they do not view this as a probable event.
- Financial Performance: In 2020, and Q3 2021, there were a few concerning metrics that arose from their financial statements. These include their cost of good sold out-pacing their revenue growth (means margins are shrinking), and their net income has been steadily decreasing during these timeframes. If these trends continue, it could invalidate my DCF model, and their fair value would be lower than I estimated.
- Financial Performance: In 2020 and Q3 of 2021, Penn reported decent earnings, but there are still areas to improve upon in order to attract more investors, and potentially increase the share price. Firstly, their net revenues and gross profits have both been steadily increasing (which is good), however $PEP can take this to the next level by breaking the downward trend of their net incomes. It will be performances like these that compel Pepsi to keep increasing their guidance and excite their investors.
- Share Repurchasing: Over the past couple of years, Pepsi has been repurchasing more shares than they have been issuing. This is a very good trend for investors to note, as every year their shares represent a larger stake in their company. These repurchases help investors to return more on their invested capital.