Can PepsiCo’s Investors Expect Happier Days Ahead?

by Trefis Team
+2.87%
Upside
137
Market
141
Trefis
PEP
PepsiCo
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PepsiCo stock (NASDAQ: PEP) has rallied 27% since late March (vs. about 40% for the S&P 500) to its current level of $133. This is after falling to a low of $104 in late March, as a rapid increase in the number of Covid-19 cases spooked investors, and resulted in heightened fears of an imminent global economic downturn. The stock is currently about 7% below its February 2020 high of $143. Are the gains warranted or are investors getting ahead of themselves? We believe that the stock recovery is justified, and think the stock price is likely to increase marginally from its current level in the near term. Our conclusion is based on our detailed comparison of PepsiCo’s stock performance during the current crisis with that during the 2008 recession in our dashboard analysis.

How Did PepsiCo Fare During 2008 Downturn?

We see PEP’s stock declined from levels of around $51 in October 2007 (the pre-crisis peak) to roughly $34 in March 2009 (as the markets bottomed out) – implying that the stock lost as much as 33% of its value from its approximate pre-crisis peak. This marked a drop that was smaller than the broader S&P, which fell by about 51%.

However, PEP’s stock recovered strongly post the 2008 crisis to about $45 in early 2010 – rising by about 30% between March 2009 and January 2010, as against the S&P which bounced back by about 48% over the same period.

In comparison, PEP’s stock lost 27% of its value between 19th February and 23rd March 2020, and has already recovered 27% since then. The S&P in comparison fell by about 34% and rebounded by about 40%.

Is The Recovery Warranted & Can We Expect Further Gains?

The global spread of coronavirus in early 2020 affected industrial and economic activity. This is likely to adversely affect consumption and consumer spending, which 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 While the company has already withdrawn its guidance for full-year 2020, we believe the company’s Q2 results in July will confirm a hit to its revenues, as most of the impact of the crisis was felt during Q2.

However, over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. compared to the rate seen in April-May to boost market expectations. Additionally, the gradual lifting of lock downs is also giving investors confidence that developed markets have put the worst of the pandemic behind them. Following the Fed stimulus — which helped set a floor on fear — the market has been willing to “look through” the current weak period and take a longer-term view, with investors now mainly focusing their attention on 2021 results.

As the global economy opens up and lock downs are lifted in phases, consumer demand is expected to pick up, and in addition to that, reduction of supply bottlenecks and effect of recent acquisitions (Sodastream) will also lead to higher sales. This could be reflected Q4 2020 onward, followed by healthy revenue growth in 2021. Additionally, the company’s new Productivity Plan which lists out steps to cut costs and improve efficiency is expected to lead margin growth in 2021. Though the stock has recovered how much it lost between February and March 2020, with investors’ focus now primarily shifting to 2021 numbers, we believe expectations of healthy revenue and margin growth is likely to drive the stock higher from its current level of $133. As per PepsiCo Valuation by Trefis, the company’s fair price works out to about $141.

So, while PepsiCo seems to have a modest upside from its current level, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

For further insight in to the food and beverage industry, you can see a comparative analysis of PepsiCo vs. Coca-Cola and why we feel Keurig Dr Pepper is better placed compared to Coca-Cola.

 

See all Trefis Price Estimates and Download Trefis Data here

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