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PepsiCo (NYSE:PEP) is a great company, with a diverse geographical market and a strong market position worldwide. Also, PEP is the second largest food and beverage company of the world following Coca-Cola (NYSE:KO). PEP delivered strong financial results recently for the year 2012 and recent fourth quarter. However, I believe PEP stock remains overvalued at current forward P/E of 16.5 and higher PEG of 4.5 as compared to its peers.

PEP is focused on improving its cost structure and reinvesting in order to strengthen its product portfolio. CEO Indra Nooyi has clear intentions to focus on healthy products, as consumers are becoming more health conscious. The EO faced a lot of criticism due to her 'healthy products' strategy as it was taking away the focus from the company's older brands. However, it's not that PEP is only focusing on healthy products; the company has increased its marketing efforts on its flagship products which include Quaker, Frito-Lay and others. New products like Pepsi Next and Gatorade Energy Chews are also boosting sales of PEP.

All these efforts seems to be positive for the company as it reported strong and better than anticipated results for 2012 and recent fourth quarter.

Recent fourth quarter profit rose by 17%, mainly due to higher prices and improved efficiency. Core EPS for the fourth quarter stood at $1.09, beating the EPS consensus of $1.05. It was also able to beat the full year earnings per share consensus of $4.07 by posting core EPS of $4.1 for 2012. It was not just bottom line beat by PEP, as reported revenues of $19.95 billion for 4Q'12 were also better than the consensus of $19.7 billion.

PEP is well positioned in the global markets that led to a 5% organic revenue growth for the recent quarter and full 2012. Growth in the developed markets is slow but is strengthening gradually with improving consumer spending. However, growth in developing and emerging markets remains robust, as net revenues for these markets grew by 9% YoY for the recent fourth quarter and full year 2012.

Following table shows organic revenue growth for 2012 and 4Q'12 of different reporting divisions.

4Q'12

2012

PAF

8%

7%

PAB

2.5%

1.5%

AMEA

8%

10%

Total PepsiCo

5%

5%

Source: Earnings Release

Apart from impressive financial results posted recently by PEP, it has increased its quarterly dividend by 5.6% to a new annualized dividend rate of $2.27 per share. The new high dividend rate will be effective from June, 2013. Based on the new dividend rate, the stock offers a dividend yield of 3.1%. Other than 3.1% forward dividend yield, PEP has announced a new share buyback program of up to $10 billion from July 2013 through June 2016. As the number of shares outstanding will reduce due to this buyback program, I believe this will increase ROE and result in EPS growth for PEP going forward.

Given the strong dividend history and past cash flow from operations (CFO) to dividend relationship, I believe dividends offered by PEP are sustainable.
(click to enlarge)
Source: Company Reports

I believe PEP will deliver strong financial results in the future as it has been focusing on its flagship products and productivity savings. Productivity savings for 2013 are estimated by the company to be $900 million. Also, PEP is anticipating 7% core constant currency EPS growth for 2013 as compared to last year. And analysts are forecasting 5 years annual growth rate of 4% for PEP.

Conclusion
PEP is a great company with solid historical financial performance, but I believe PEP stock is overvalued at current pricing. PEP currently has an expansive forward P/E of 16.5x compared to its industry's average of 15x. Moreover, PEP's PEG of 4.5 reflects the stock offers expensive growth as compared to its peers. I recommend investors to wait for a dip before initiating a buy position.

PEP

Coca Cola

General Mills (NYSE:GIS)

Dr Pepper Snapple (NYSE:DPS)

Average

Forward P/E

16.5x

15.5x

15x

13.5x

15x

PEG

4.5

2

2

2.2

2.6

Source: Yahoo Finance

Source: PepsiCo: A Great Company That's Currently Overvalued