Is PepsiCo Stock Fairly Valued After Its 50% Recovery?

+5.03%
Upside
167
Market
175
Trefis
PEP: PepsiCo logo
PEP
PepsiCo

Even after almost a 50% rise from its March 2020 lows, PepsiCo stock (NASDAQ: PEP) still has marginal upside. PEP stock increased from $104 to $154 off its 2020 lows, though that was still less than the 90% recovery in the S&P 500 from its 2020 bottom. Even though the stock is 40% above its December 2018 level, we believe the recent rally in the stock is justified. The stimulus measures and successful rollout of the vaccines have led to expectations of faster economic recovery and a rise in consumer spending. This will benefit a food and beverage giant like PepsiCo to 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 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 will keep the stock elevated and might even see a marginal uptick to settle close to $158. Our dashboard PepsiCo (PEP) Stock Has Gained 40% Since 2018 has the underlying numbers.

The stock price rise between 2018 and 2020 was justified by an almost 9% rise in revenues from $64.7 billion in 2018 to $70.4 billion in 2020. Higher revenue was driven by acquisitions, introduction of new offerings, and strong performance of the Frito-Lay division. On a per share basis, revenue increased 11% from $45.7 in 2018 to $50.8 in 2020. At the same time the company’s P/S multiple also increased more than 20% from 2.4x to close to 3x. The multiple stands at 3x currently and is expected to remain close to its current elevated levels on expectations of revival in consumer demand and a favorable shareholder return policy.

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Outlook

The global spread of coronavirus led to lockdown in various cities across the globe, which affected industrial and economic activity. This took a toll on 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 revenues declined by 3.1% y-o-y while earnings dropped 18%. However, with lockdowns being gradually lifted and consumer demand increasing, the company’s top line has seen a recovery. Revenues in the first half (Q1 and Q2) of 2021 increased 14% compared to the year-ago period, with the coming quarters expected to see a continuation of this upward trend.

Any further 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 Israel. With the lifting of lockdowns, the reduction of supply bottlenecks is expected to help a company like PEP, which has a global supply network, to increase its volume sales. Recent acquisitions like Sodastream and 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 the coning quarters. With investors’ focus having shifted to 2021 and 2022 numbers, expectations of healthy revenue and earnings growth, along with management’s commitment to return $5.9 billion (comprising dividend and share repurchases) in 2021, PEP stock is likely to sustain its momentum. As per Trefis, PepsiCo valuation works out to $158 per share.

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