PepsiCo Will Quench Your Thirst: Stock To Hit $150

Despite more than a 30% rise since the March lows of this year, at the current price of $136 per share, we believe PepsiCo stock (NASDAQ: PEP) is still a good opportunity for investors. PEP stock has increased from $104 to $135 off the recent bottom, less than the S&P which increased by 50% from its recent lows. Even though the stock is around 23% 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 over 10% 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 23% Change In PepsiCo Stock Between 2017 And Now? has the underlying numbers behind our thinking.

Some of the sharp stock price rise between 2017 and 2019 is justified by the 5.7% growth seen in PepsiCo’s revenues during this period, the effect of which was further amplified by a 42% rise in profitability. 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 productivity program. On a per share basis, earnings increased from $3.40 in 2017 to $5.23 in 2019.

PepsiCo’s P/E multiple dropped from 32x at the end of 2017 to 26x by the end of 2019 mainly due to growth in EPS being higher than 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 (same as Dec 2019 level). 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.

Where Is The Stock Headed?

The global spread of coronavirus in early 2020 affected consumption and consumer spending. Additionally, the lockdowns in major global cities over recent months also had an adverse effect on companies with global supply chains like PepsiCo. This was reflected in PEP’s Q2 2020 results, where PepsiCo’s revenues declined by 3.1% y-o-y while earnings dropped 18%. However, with the lockdowns being lifted gradually and consumers feeling slightly more comfortable stepping out than what they did during Q2, the company reported a 5% increase in revenues in Q3 2020. This was also driven by higher demand for snacks.

The actual recovery and its timing hinge on the broader containment of the coronavirus spread. Our dashboard Trends In U.S. Covid-19 Cases provides an overview of how the pandemic has been spreading in the U.S. and contrasts with trends in Brazil and Russia. The only major concern that the company faces currently is the recent spike in Covid-positive cases, which has led to certain restrictions in Europe. Another lockdown will surely hamper the company’s recovery process and could, in fact, lead to a short-term slide in price. However, at this stage, re-imposition of a lockdown similar to what was seen in the first half of 2020 is highly unlikely.

As economies open up and restrictions are lifted gradually, consumer demand is set to pick up further, thus leading to recovery in the beverages category as well as with snacks. Reduction of supply bottlenecks and the effect of recent acquisitions (Sodastream) will also lead 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. With investors’ focus already having shifted to 2021 numbers, healthy revenue and earnings growth is likely to drive the stock price higher. The management’s commitment to return $7.5 billion (dividends of $5.5 billion and share repurchases of $2 billion) to shareholders in 2020 will aid this process in the form of a higher P/E. As per PepsiCo’s valuation by Trefis, we have a price estimate of $150 per share, reflecting a potential upside of 10% from its current level.

For further insight into 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.

What if you’re looking for a more balanced portfolio instead? Here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.

See all Trefis Price Estimates and Download Trefis Data here

What’s behind Trefis? See How It’s Powering New Collaboration and What-Ifs For CFOs and Finance Teams | Product, R&D, and Marketing Teams