Benjamin Rains
·3 min read
PepsiCo (PEP) stock is down 12% from its May peaks heading into its Q4 earnings release on Friday, February 9.
The stock has crushed the Zacks Consumer Staples sector and rival Coca-Cola (KO) over the last decade. Plus, its dividend yield is solid and its valuation levels are intriguing.
The Basic Bull Case
PepsiCo’s brands include Gatorade, Tostitos, Pepsi, Bubly, and much more. Pepsi has posted impressive growth over the last several years as it successfully navigates new dietary habits and ongoing challenges from upstarts and its core rival Coca-Cola. PEP shares went on a strong run off the Covid lows and got off to a hot start in 2023.
The stock then dropped as more investors grew nervous about the growing use of weight loss drugs and the possible negative near-term and long-term impact they might have on PepsiCo, Coca-Cola, and tons of other consumer staples brands, as well as the likes of McDonald’s (MCD). PepsiCo also got caught up in wider selling across consumer staples because higher interest rates made their dividends less impressive.
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Interest rates have already peaked and the Fed is poised to start cutting rates at some point in 2024, making PepsiCo’s 2.9% dividend yield, which blows away SPY’s 1.3% and matches KO’s 3.0%, more attractive sooner than later. Plus, PepsiCo’s results and outlook showcase that despite the success of weight loss drugs and some changing consumer habits, soda and snacks remain a booming business.
PEP’s sales are projected to jump 7% in FY23 and over 4% in FY24 to climb from $86.39 billion last year to $96.05 billion in 2024. PepsiCo’s expected expansion follows 9% sales growth last year and 13% higher revenue in FY21. Meanwhile, its adjusted EPS are projected to climb by over 11% this year and then pop 7.4% higher in FY24.
Other Fundamentals
PEP’s stagnant earnings revisions help it land a Zacks Rank #3 (Hold). But the company has topped our quarterly EPS estimates for five years running.
PepsiCo shares have climbed 115% over the last 10 years vs. the Zacks Consumer Staples sector’s 21% and Coca-Cola’s 60%. Expanding our view to 20 years, PEP has climbed by 230% vs. Coca-Cola’s 140% and its sector’s 71%.
Image Source: Zacks Investment Research
PEP has popped 22% in the last three years, but it is now trading around where it was this time last year. The stock is down 12% from its peaks and trading 11% below its average Zacks price target. The stock has climbed 9% since mid-October after it found support at its 200-week moving average.
PepsiCo is back above its 50-day moving average and floating around neutral RSI levels on a 10-year timeframe. Valuation-wise PepsiCo trades at a 22% discount to its highs at 20.9X forward earnings and slightly below its 10-year median and KO despite its outperformance.
Bottom Line
Buying stocks right before earnings strictly to try to cash in on a big bounce is a risky proposition. Long-term investors, on the other hand, might want to consider buying and holding PepsiCo stock for many of the reasons touched on here, coupled with the fact that it has rarely traded below its 50-week moving average for very long over the past decade like it is right now.
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CocaCola Company (The) (KO) : Free Stock Analysis Report
McDonald's Corporation (MCD) : Free Stock Analysis Report
PepsiCo, Inc. (PEP) : Free Stock Analysis Report
