PepsiCo, Inc. (PEP)

Equity
US
Consumer Defensive

RISK

RETURN

Key risk factors

Negligible price volatility

Strong & resilient to price shocks

Good trading liquidity

Key return factors

Very strong margins and returns

Solid dividends

Greatly overvalued vs peers

Corporate actions & dividendsDividend of USD 1.355 with an ex-date of 07 Jun 2024.

Company profilePepsiCo, Inc. manufactures, markets, distributes, and sells various beverages and convenient foods worldwide. The company operates through seven segments: Frito-Lay North America; Quaker Foods North America; PepsiCo Beverages North America; Latin America; Europe; Africa, Middle East and South Asia; and Asia Pacific, Australia and New Zealand and China Region. It provides dips, cheese-flavored snacks, and spreads, as well as corn, potato, and tortilla chips; cereals, rice, pasta, mixes and syrups, granola bars, grits, oatmeal, rice cakes, simply granola, and side dishes; beverage concentrates, fountain syrups, and finished goods; ready-to-drink tea, coffee, and juices; dairy products; and sparkling water makers and related products. It serves wholesale and other distributors, foodservice customers, grocery stores, drug stores, convenience stores, discount/dollar stores, mass merchandisers, membership stores, hard discounters, e-commerce retailers and authorized independent bottlers, and others through a network of direct-store-delivery, customer warehouse, and distributor networks, as well as directly to consumers through e-commerce platforms and retailers. The company was founded in 1898 and is headquartered in Purchase, New York.

Valuation: Greatly overvalued

Multiple

TTM

NTM

P/E

26.80

22.80

PEG

3.30

P/B

12.90

8.20

P/S

2.70

2.60

P/FCF

34.00

33.20

EV/EBITDA

15.60

16.60

Based on key historical and expected multiples, the stock is greatly overvalued relative to its peers. Specifically, the stock is fairly valued on P/E, overvalued on EV/EBITDA, and overpriced on P/FCF.

Performance: Mixed

The stock's performance has been mixed in the past six months, with growth following a decline. There is no clear price trend compared to its global peers from the same sector and industry (as shown above). The stock has outperformed this peer group by 6ppts over past six months and grown 2ppts faster in the past month. This is largely true for peers from the same country and sector. With respect to the stock's valuation against its peers, its overall price performance is neutral.

Analyst view: Somewhat favourable

The average target price is 181 and suggests 1% upside potential. Usually, this means a HOLD recommendation among investment firms. This neutral recommendation suggests no significant price movement, up or down, in the next 12 months. The most optimistic analyst has a target price of 211.0. This translates into 18% upside potential in the best case. On the other hand, the most pessimistic analyst has a target price of 151.0. This is equivalent to 16% downside potential in the worst case.

Profitability: Very strong

RoE

PepsiCo, Inc. reported a return on equity (RoE) of 48.9% in the last 12 months, down from 50.9% in FY23. The market consensus projects an RoE of 55.2% in FY24, again ahead of its peers.

RoA

Another important profitability metric, return on assets (RoA), amounted to 9.2% in the last 12 months, a decrease from 9.4% in FY23. The market analysts predict that RoA will be 10.7% in FY24, again stronger than its peers.

RoCE

In the last 12 months, the return on capital employed (RoCE) declined to 13.2%, above the peers. The consensus estimate for FY24 for RoCE is 23.7%, again ahead of the peers.

Net margin

EBITDA margin

Historically, PEP has reported good net margins compared to its global peers. Specifically, in the last 12 months, this metric equalled 10.0%, a growth from 9.9% in FY23. The company has reported average EBITDA margins compared to its global peers in recent years. EBITDA margin amounted to 18.9% in the last 12 months, up from 18.7% in FY23.

RoIC / WACC = 2.8(strong value creation)

The ratio of return on invested capital (RoIC) to the weighted average cost of capital (WACC) has been 2.8 in the past several years. This ratio implies a strong shareholder value creation.

Growth: Average

Revenue

EBITDA

EPS

Free cash flow

PEP reported revenue of USD 91 875mn in the last 12 months, up 0% from FY23. At the same time, the dynamics of cash flow, as measured by free cash flow (FCF), were drastically different. EPS grew 1% from FY23 to USD 6.68. Market expects EPS to reach USD 7.7725 in FY24.Revenue growth has been constrained in the past several years (negative-to-neutral), while EBITDA growth has been steady. This all contributed to slow EPS growth (neutral). The FCF trend is in line with EBITDA. We emphasize the highly volatile dynamics of FCF. On the positive side, revenue and EPS dynamics is very stable.

Dividends: Solid

Dividend paid

Dividend yield

The company has a track record of regular dividend payments. It has paid dividends in each of the past ten years. Dividend per share (DPS) has grown yearly, and there is an evident trend. In the past 12 months, the dividend yield has been good and slightly above its peers. On average, the company pays dividends quarterly, which may appeal to investors valuing a regular income stream.

Default risk: Moderate

The risk of default is moderate. We note solid return on capital and adequate interest coverage, among the positive credit factors. Among the negative credit factors, we point to slow historical revenue growth, poor working capital management, and an unfavourable capital structure.

Volatility: Negligible

In normal market circumstances, PEP is not volatile. Put differently, without outstanding market volatility or shocking company news, the stock's price will stay within a narrow range. The stock's losses on its worst days (less than 1-5% of the time) will range from very low to negligible.

Stress-test: Negligible

In highly turbulent market conditions, PEP is not volatile. In other words, the stock will fall far less than the index in times of extreme market volatility or shocking company news. Standalone, the worst-day losses (less than 1% of the time) will likely be very low.

Selling difficulty: Low

PEP boasts high trading liquidity. The average private investor can sell his common position in the stock immediately. Liquidity is usually very stable and remains mildly favourable on the days with the lowest activity. The trading volume mostly stays the same even under highly turbulent market conditions.

Country risk: Very low

The institutional, legal, and compliance risks associated with the company's country are minimal. In combination with stringent business standards, shareholder rights are very highly protected.

Other risks: Negligible

No other major risks have been identified.