PepsiCo Stock To Cross $140 After Better Than Expected Q2 2020?

Despite a 30% rise since the March 20 lows of this year, at the current price of around $135 per share, we believe PepsiCo stock (NASDAQ: PEP) has more upside left. PEP stock has increased from $104 to $135 off the recent bottom, less than the S&P which increased by 41% from its recent bottom. Even though the stock is around 21% above the level at which it was at the end of 2017, it is still lower than its pre-Covid (February 2020) high of $147. We believe that PEP’s stock could rise close to 4%-5% from its current level, driven by expectations of rising demand and easing of supply constraints following the gradual lifting of lockdowns and benefits from recent acquisitions. Our dashboard What Factors Drove 21% Change In PepsiCo Stock Between 2017 And Now? has the underlying numbers.

Some of the sharp stock price rise between 2017-2019 is justified by the 5.7% growth seen in PepsiCo’s revenues during this period, the effect of which was further magnified by a 42% rise in profitability, as net income margins increased from 7.7% in 2017 to 10.9% in 2019. Margins shot up in 2018 due to tax benefits received, but margin in 2019 was still above the 2017 level due to benefits from the company’s cost efficiency measures. On a per share basis, earnings increased from $3.40 in 2017 to $5.23 in 2019.

PepsiCo’s P/E multiple dropped from 33x at the end of 2017 to 26x by the end of 2019 mainly due to growth in EPS, which was coupled with a slower growth in the stock price. However, the P/E multiple dropped further in the initial few months of 2020 only to recover over the recent weeks, and now stands at 26x. We believe that the company’s P/E ratio has the potential to see a slight increase in the near term on expectations of revival in consumer demand and favorable shareholder return policy, thus driving the stock price higher.

What’s The Likely Trigger & Timing For Further Upside?

The global spread of coronavirus in early 2020 affected industrial and economic activity, which affected consumption and consumer spending. Additionally, the lockdowns in major global cities over recent months also had an adverse effect on global companies with global supply chains like PepsiCo. PEP’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. However, the second quarter which was expected to reflect the full impact of the crisis, saw only a 3.1% decline in PepsiCo’s revenues on y-o-y basis, though EPS saw a sharper decline of 18%. While the company has already withdrawn its guidance for full-year 2020, it expects certain foreign currency headwinds to take a toll on its earnings in 2020.

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.

With the worst quarter (Q2 2020) with respect to coronavirus impact behind us, and as the global economy opens up and lock downs are lifted in phases, consumer demand is expected to pick up. Additionally, reduction of supply bottlenecks and effect of recent acquisitions (Sodastream) will also lead to higher sales. This could be reflected from Q4 2020 onward, followed by healthy revenue growth in 2021. Additionally, the company’s new Productivity Plan under which PEP is taking steps to cut costs, automate certain processes and improve efficiency is expected to lead to margin growth in 2021. Though the stock has recovered sharply since 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 $135. Also, the management’s commitment to return $7.5 billion (dividends of $5.5 billion and share repurchases of $2 billion) to shareholders in 2020 could lead to a higher P/E and thus increase in price. As per PepsiCo Valuation by Trefis, the company’s fair price works out to about $141, thus providing a potential gain of 4%-5%.

So, while PepsiCo could rise 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.

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