PepsiCo’s Stock Down 10% vs. 28% Decline In S&P 500; But Will It Underperform Post Coronavirus?

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PepsiCo’s (NASDAQ: PEP) stock is likely to underperform the broader S&P 500 index post coronavirus and oil price war crisis, going by the trends seen during the 2008 slowdown, where it fell 33% from the approximate pre-crisis peak in 2008, and recovered 30% by early 2010. The decline in PepsiCo’s stock, and recovery, were lower than that of the S&P 500. We compare the performance of PepsiCo vis-à-vis the S&P 500 in our interactive dashboard analysis, 2007-08 vs. 2020 Crisis Comparison: How Did PepsiCo Stock Fare Compared With S&P 500?

On Monday, March 9, the stock market saw its biggest sell off since the 2008 crisis, with the decline continuing throughout the week. There were two distinct trends driving the sell-off. Firstly, the increasing number of Coronavirus cases outside China is causing mounting concerns of a global economic slowdown. Secondly, crude oil prices plummeted by more than 20% after Saudi Arabia increased production. PepsiCo’s stock fell 7% between 8th March and 17th March 2020, and is down by a total of 9.5% since early February, considering the impact that the outbreak and a broader economic slowdown could have on total consumption/consumer spending and the global food and beverage industry.

Moreover, about 10% of PepsiCo’s total revenue comes from the Asia Pacific region, which has been the worst impacted by the outbreak. Lower consumer spending and consumption would lead to lower demand for food and beverages, in turn affecting PepsiCo’s revenues. However, the majority of the company’s revenue is contributed by geographies that are not severely affected by the virus, leading to a decline in stock price that is lower than the decline in the broader market. Also, going by the trends seen during the 2008 economic slowdown, it’s likely that PepsiCo’s stock could bounce back strongly but potentially underperform the market as the crisis winds down, as the stock decline was not as great as that of the market in the first place, leading to a smaller rebound for the stock.

Below we discuss how the company’s stock reacted to the economic crisis of 2008 and compare its performance with the S&P 500. View our complete dashboard analysis on 2007-08 vs. 2020 Crisis Comparison: How Did PepsiCo Stock Fare Compared With S&P 500?

PepsiCo Stock versus S&P 500 Over 2020 Coronavirus/Oil Price War Crisis

  • PepsiCo’s stock declined by about 7% between 8th March 2020 and 17th March 2020, and the stock is down by about 9.5% since February 1, after the WHO declared a global health emergency.
  • The S&P 500 declined by 20% between 8th March 2020 and 17th March 2020, and has fallen by 28% since February 1, after the global health emergency was declared by the WHO.

PepsiCo versus the S&P 500 During 2007-08 Financial Crisis

  • PEP stock declined from levels of around $51 in October 2007 (the pre-crisis peak) to levels of around $34 in March 2009 (as the markets bottomed out) and recovered to levels of about $45 in early 2010.
  • Through the crisis, PEP stock declined by as much as 33% from its approximate pre-crisis peak. This marked a lower decline than the S&P which fell by as much as 51%.
  • However, the stock recovered strongly, rising by 30% between March 2009 and January 2010. In comparison, the S&P rose by about 48% over the same period.

Impact on Interest Coverage Ratio

  • Though PepsiCo’s revenue base is almost double that of Coca-Cola, its interest coverage ratio was only slightly better than that of its major rival in 2019.
  • However, its coverage metric is expected to deteriorate and fall behind Coca-Cola over the next couple of years, as PepsiCo is plagued by higher-interest rate debt instruments on its balance sheet (effective interest rate of 3% for PEP vs. 2% for KO).
  • With the spread of coronavirus impacting the sales of beverage companies, our analysis shows that a 10% drop in projected revenues along with lower margins would lead to a drop of 18% and 13% in PEP’s coverage ratio for 2020 and 2021, respectively. Similarly, Coca-Cola’s ratio is expected to drop by 17% and 15%, respectively, during the next two years.
  • PepsiCo’s interest coverage is expected to be 9.7x and 11.5x in 2020 and 2021, respectively, compared to Coca-Cola’s coverage ratio of 10.3x and 12.1x during next two years.
  • Thus, Pepsi’s coverage ratio is expected to be worse in comparison to Coca-Cola over the next two years if revenue projections go down by 10% due to the impact of coronavirus.

Conclusion

While PepsiCo’s stock has declined due to the Coronavirus/Oil Price War crisis, going by trends seen during the 2008 slowdown, it’s likely that it could bounce back strongly but potentially underperform the broader market (due to rebounding less as it dropped less) as the crisis winds down.

For more detailed charts and a timeline of the 2008 and 2020 crisis for different stocks, view our interactive dashboard analyses on coronavirus.

 

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