We believe PepsiCo stock (NASDAQ: PEP) may be a decent opportunity at the moment. PEP trades at $138 currently and is up 1% from its level at the beginning of 2020. However, the stock is still down compared to the levels seen before the pandemic. PEP stock traded at $146 in February 2020 (just before the outbreak of the coronavirus pandemic) and is still 5% below that level. Also, the stock has gained 31% from the low of $105 seen in March 2020, less than S&P 500 which recovered almost 70% during the same period. 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. Also, the company continues to get into partnerships, such as the recent tie-up with fast-growing food company Beyond Meat, which will help in further expansion of the top and bottom line. Our conclusion is based on our detailed comparison of PepsiCo stock performance during the current crisis with that during the 2008 recession in our dashboard analysis.
2020 Coronavirus Crisis
Timeline of 2020 Crisis So Far:
- 12/12/2019: Coronavirus cases first reported in China
- 1/31/2020: WHO declares a global health emergency.
- 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
- 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, 2020, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
- Since 3/24/2020: S&P 500 recovers 68% from the lows seen on Mar 23, 2020, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.
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In contrast, here’s how PepsiCo and the broader market performed during the 2007/2008 crisis.
Timeline of 2007-08 Crisis
- 10/1/2007: Approximate pre-crisis peak in S&P 500 index
- 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
- 3/1/2009: Approximate bottoming out of S&P 500 index
- 12/31/2009: Initial recovery to levels before accelerated decline (around 9/1/2008)
PepsiCo and S&P 500 Performance During 2007-08 Crisis
PEP stock declined from levels of close to $74 in September 2007 (pre-crisis peak) to levels of little over $48 in March 2009 (as the markets bottomed out), implying PEP stock lost 35% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of over $61 in early 2010, rising by 26% between March 2009 and January 2010. In comparison, the S&P 500 Index saw a decline of 51% and recovered 48%.
PepsiCo Fundamentals Over Recent Years
PepsiCo’s revenues grew 7% from $62.8 billion in 2016 to $67.2 billion in 2019, primarily led by strong performance in the Frito-Lay segment and acquisitions over the years. Along with strong growth in revenues, the company was able to expand its margins due to its Productivity Program, with earnings rising from $4.39 per share in 2015 to $5.23 in 2019. Despite the pandemic, revenues in the first nine months of 2020 also saw a y-o-y growth of 3% due to impressive performance in the Frito-Lay division.
Does PEP Have Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?
PEP’s total debt increased from $36.9 billion in 2016 to $44.6 billion at the end of Q3 2020, while its total cash decreased from $16.1 billion to $9.7 billion over the same period. At the same time, the company’s cash from operations for the first nine months of 2020 increased to $6.1 billion from $5.1 billion from the year-ago period. Though debt has increased, the company’s increased CFO generation and a strong cash balance is likely to help PEP weather the current crisis.
Phases of Covid-19 Crisis:
- Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
- Late-March 2020 onward: Social distancing measures + lockdowns
- April 2020: Fed stimulus suppresses near-term survival anxiety
- May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
- Since late 2020: Weak quarterly results, but continued improvement in demand and progress with vaccine development buoy market sentiment
Despite the recent surge in the number of new Covid-19 cases in the U.S., we expect continued improvement in demand to buoy market expectations. As investors focus their attention on expected 2021 results, we believe PepsiCo stock has the potential for modest gains once fears surrounding the Covid outbreak are put to rest. 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.