The share price of PepsiCo (PEP) has appreciated by 21% year to date and is currently trading near its 52-week high. In my view, investors should avoid the shares now as the stretched valuation has left s very limited margin of safety on the investment. My bearish opinion is backed by the following reasons:
1. PepsiCo's consensus revenue, EBITDA, and EPS estimates for 2013 and 2014 have experienced multiple downward revisions over the past 12 months, and their current levels are notably below the historical figures of a year ago (see charts below). Nevertheless, the stock's forward P/E multiple has expanded by 16% over the period, suggesting the valuation has become increasingly frothy as the rise is not substantiated by any significant fundamental developments (see chart below).
2. PepsiCo shares are currently trading on par with Coca-Cola (KO) in terms of P/E and PEG multiples. Although both companies share a similar growth profile, PepsiCo's profitability performance considerably lags that of Coca-Cola. The company's liquidity position is also no better than Coca-Cola's. As such, the fair value for PepsiCo shares should be at a modest discount relative to Coca-Cola's (see chart below).
3. From a historical standpoint, PepsiCo's valuation also appears to be expensive. Over the past 3 years, the company has been able to maintain steady profitability margins. The capital return performance has been mediocre due to the slightly declining ROE, ROA, and ROIC trends. Further, PepsiCo's revenue, EBITDA, and EPS growth rates have all slowed down substantially over the period, and their consensus estimates are only showing a flat trend ahead. Despite that, PepsiCo's trailing P/E multiple has risen by 26% over the past 3 years and just reached its 3-year high (see charts below).
4. Of the total 17 analyst ratings compiled by Thomson One, there are 3 strong buy and 7 buy ratings. However, the average 1-year price target at $85.83 is only 3.4% above the current share price. Given that PepsiCo should command an at least 5% cost of equity based on the capital asset pricing model (see chart below), sell-side's average price target actually implies that the stock has reached or even exceeded its full value.
5. PepsiCo's dividend yield is hovering around its lowest level since 2009 at 2.7% and is in line with Coca-Cola's yield. I believe the stock's attractiveness to institutional dividend investors would have notably diminished (see chart below).
Given the above, I would suggest investors to avoid the stock at the current price level as the risk is to the downside. However, unless for speculative purpose, I would not recommend shorting the stock as the company fundamentals are gaining some momentum as reflected by its recent quarterly results.
All charts are created by the author except for the consensus estimate tables, which are sourced from S&P Capital IQ, and all financial data used in the article and the charts is sourced from S&P Capital IQ unless otherwise specified.