Is The 40% Rally In PepsiCo Stock Justified?

PepsiCo stock (NASDAQ: PEP) trades at $144 currently and is up 5% 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 1% below that level. Also, the stock has gained almost 40% from the low of $105 seen in March 2020 and we believe that this rise is justified. The rally was driven by economic as well as company-specific factors. The successful rollout of the vaccination program and stimulus measures have led to expectations of faster economic recovery and rise in consumer spending. This will benefit a food and beverage giant like PepsiCo improve its sales and margins. Additionally, the recent rally is also a reflection of the continued innovation at the company. With PepsiCo having benefited from the at-home consumption trend, it has recently introduced the Neon Zebra – part of the non-alcoholic cocktail mixer category – in four different flavors, to capitalize on the pick-up in the at-home cocktail making trend. It also launched a new juice product line (Frutly) for its young consumer base. New launches to take advantage of the latest consumption trends and when the economy is set to recover, have led to expectations of healthy revenue and earnings growth in the coming quarters. We believe that most of the near-term growth is already accounted for in the stock price and PEP stock will only see a marginal rise to reach $150 in the near term. Our conclusion is based on the 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 85% 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.

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 $73 in September 2007 (pre-crisis peak) to levels of little over $48 in March 2009 (as the markets bottomed out), implying PEP stock lost 34% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of over $61 in early 2010, rising by 27% 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 revenues grew 11% from $63.5 billion in 2017 to $70.4 billion in 2020, 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 $3.40 per share in 2017 to $5.14 in 2020.

Does PEP Have Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

PEP’s total debt increased from $39.3 billion in 2017 to $44.1 billion at the end of 2020, while its total cash decreased from $19.5 billion to $9.7 billion over the same period. At the same time, the company’s cash from operations have been healthy at $10.6 billion in 2020. Though debt has increased, the company’s increased CFO generation and a strong cash balance is likely to help PEP weather the current crisis.

Conclusion

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

PepsiCo stock has recouped the losses it suffered last March, and currently trades around its pre-Covid peak. We believe that the stock has the potential for modest gains as demand rises in the near future with expectations of subdued growth in the number of new Covid-19 cases in the U.S. Also, new product launches by the company are expected to benefit the beverage giant. As per Trefis, PepsiCo’s valuation works out to $150 per share.

E-commerce is eating into retail sales, but this might be an investment opportunity. See our theme on E-commerce Stocks for a diverse list of companies that stand to benefit from the big shift.

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