PepsiCo, Inc (NYSE:PEP) is a global food and beverage company which operates four business units: PepsiCo Americas Foods, PepsiCo Americas Beverages, PepsiCo Europe and PepsiCo Asia Middle East and Africa. On July 24, 2013, the company reported second-quarter earnings of $1.31 per share, which beat the consensus of analysts' estimates by $0.12. Since last writing about the stock back on May 27, 2013, the stock is down 3.69% excluding dividends (down 2.29% including dividends), and is losing to the S&P 500, which has gained 0.21% in the same time frame. With all this in mind I'd like to take a moment to evaluate the stock on a fundamental, financial, and technical basis to see if it's worth buying some more of the company right now for the consumer goods sector of my dividend portfolio.
Pepsi currently trades at a trailing 12-month P/E ratio of 18.76, which is fairly priced, but I mainly like to purchase a stock based on where the company is going in the future as opposed to what it has done in the past. On that note, the 1-year forward-looking P/E ratio of 16.84 is currently fairly priced as well for the future in terms of the right here, right now. Next year's estimated earnings are $4.72 per share. The one-year PEG ratio (2.23), which measures the ratio of the price you're currently paying for the trailing 12-month earnings on the stock while dividing it by the earnings growth of the company for a specified amount of time (I like looking at a 1-year horizon), tells me that the company is expensively priced based on a 1-year EPS growth rate of 8.42%.
On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. Pepsi boasts a dividend of 2.85% with a payout ratio of 50.1% of trailing 12-month earnings (or 84.3% based on free cash flow) while sporting return on assets, equity and investment values of 8.8%, 29.9% and 13.9%, respectively, which are all respectable values, but nothing to write home about. Because I believe the market may get a bit choppy here and would like a safety play, I believe the 2.85% yield of this company is good enough for me to take shelter in for the time being. The company has been increasing its dividends for the past 41 years with a 5-year dividend growth rate of 9.3% but I believe future increases may be at a low rate with its already high payout ratio.
Looking first at the relative strength index chart [RSI] at the top, I see the stock muddling around in middle territory with a value of 40.25 but with upward trajectory, which is a bullish pattern. To confirm that, I will look at the moving average convergence-divergence [MACD] chart next and see that the black line is about to cross above the red line with the divergence bars decreasing in height to the upside, indicating the stock has upward momentum. As for the stock price itself ($79.53), I'm looking at the 20-day moving average to act as resistance and the 200-day moving average to act as support for a risk/reward ratio, which plays out to be -3.48% to 1.23%.
- Morningstar has published its list of top ten holdings of their "Ultimate Stock Pickers" (a "Who's Who" of investment managers) stock picks which revealed that Pepsi is one of the chosen ones.
- In anticipation of strong demand in Thailand, the company increased production capacity.
- There has been a sharp drop in corn prices which could help Pepsi's bottom line.
Pepsi is fairly valued based on future earnings and expensively priced on future growth prospects (one-year outlook). Financially, the dividend payout ratio is middle of the road based on trailing 12-month earnings but high on free cash flow and I don't doubt management will be able to continue to increase the dividend going forward but at a very low rate; based on future earnings the dividend payout ratio goes down to around 48% (if the dividend is kept steady). The technical situation of how the stock is currently trading is telling me we might be seeing some more upward pressure. The display of short-term bullish technical, price drop in material costs and capacity expansion in Asia makes me bullish and personally I am going to layer into a position here and make a purchase.
Disclosure: I am long PEP. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
Disclaimer: These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!