Buy, Sell Or Hold PepsiCo At $131?

PepsiCo (NASDAQ: PEP) has seen much volatility in its stock price in 2020 so far. PEP’s stock declined by about 27% from $142 as on 31^st January 2020 to $104 in March 2020. The decline was driven by the announcement of a global health emergency by WHO on 31^st January. Since then the stock has recovered 26% to $131 as on 4^th May 2020, driven by the announcement of a $2 trillion stimulus package in the US. At the current market price of $131 (which is 8% lower than its pre-crisis level), we believe PepsiCo’s stock is likely to remain around the current level till the time the impact of the virus is abated. Also, PepsiCo’s stock is 17% higher than it was at the beginning of 2018, a little over 2 years ago. Our dashboard What Factors Drove 16.9% Change In PepsiCo Stock Between 2017 And Now? provides the key numbers behind our thinking, and we explain more below.

Some of the sharp stock price rise of the last 2 years is justified by the 5.7% growth seen in PepsiCo’s revenues from 2017 to 2019, the effect of which was further accentuated by a 42.4% rise in the net income margin, which increased from 4.9% in 2017 to 7.3% in 2019 due to productivity benefits. With increased net income, EPS increased from $3.40 in 2017 to $5.23 in 2019, with shares outstanding remaining almost stable.

However, a drop in PepsiCo’s P/E multiple has partially offset the rise in the company’s earnings. PEP’s P/E multiple dropped from 32.9x at the end of 2017 to 26x by the end of 2019. The multiple has further dropped to 25x currently. This reflects a 24% decrease in P/E multiple from 2017 to the current levels. However, this sharp drop in the P/E multiple between 2017 and 2019 was mainly due to growth in EPS, which was coupled with a slower growth in stock price. On the contrary, the decrease in P/E multiple since the beginning of 2020 was due to the impact of coronavirus, which we explain below.

Effect of Coronavirus

The global spread of coronavirus has led to lockdown in various cities across the globe, which has affected industrial and economic activity. This is likely to adversely affect consumption and consumer spending. PEP’s stock is down by about 27% since January 31 after the World Health Organization (WHO) declared a global health emergency in light of the spread of coronavirus. However, during the same period, the S&P 500 index saw a decline of about 12%. Lower consumer spending and consumption would lead to lower demand for food and beverages, in turn affecting PepsiCo’s revenues.

PepsiCo’s Q1 2020 was largely shielded as the impact of coronavirus has mostly been felt since March.  Also, in light of the lockdown due to coronavirus, people stocked up on products, which led to a late quarter surge in sales. While the company has already withdrawn its guidance for full-year 2020, we believe the company’s Q2 results in July will confirm a hit to its revenues. If there are signs of abatement of the crisis in May 2020, the company’s stock could see a modest upturn to reach slightly above $140. However, if there isn’t clear evidence of the containment of the virus by the end of May 2020, we believe there is a possibility that PepsiCo’s stock could hover around its current level of $130, with a sharp drop unlikely to be experienced as PepsiCo is still expected to repurchase $2 billion in shares and spend $5.5 billion on dividends in fiscal 2020 (as per management announcement during Q1 2020 results). As per PepsiCo’s Valuation by Trefis, we have a price estimate of $141 for PEP’s stock.

On the contrary, in the worst-case scenario Coca-Cola’s stock could drop to as low as $30.

Our dashboard forecasting US COVID-19 cases with cross-country comparisons analyzes expected recovery time-frames and possible spread of the virus. Further, our dashboard -28% Coronavirus crash vs. 4 Historic crashes builds a more complete macro picture. The complete set of coronavirus impact and timing analyses is available here.

See all Trefis Price Estimates and Download Trefis Data here

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