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Summary

  • The stock has hit overbought territory on a technical basis.
  • The stock is expensive on earnings growth potential.
  • The dividend yield is too low right now to make a purchase with the expensive valuations.

The last time I wrote about PepsiCo Inc. (NYSE:PEP) I stated, "…normally it is for these reasons I would not layer into my position but because the stock is showing strong bullish technicals I'm going to buy a very small position here." Since the last article was published it popped 4.51% versus the -2.02% gain the S&P 500 (NYSEARCA:SPY) posted. Pepsi 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 April 17, 2014, the company reported first quarter earnings of $0.83 per share, which beat analysts' average estimates by $0.08. In the past year the company's stock is up 6.95% excluding dividends (up 9.72% including dividends), and is losing to the S&P 500, which has gained 17.37% 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 more shares of the company right now for the consumer goods sector of my dividend portfolio.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 19.8, 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 17.49 is currently fairly priced for the future in terms of the right here, right now. The 1-year PEG ratio (2.46), 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 8.06%. Below is a comparison table of the fundamental metrics for the company for when I wrote all articles pertaining to the company.

Article Date

Price ($)

TTM P/E

Fwd P/E

EPS Next YR ($)

Target Price ($)

PEG

EPS next YR (%)

05Sep13

79.53

18.76

16.84

4.72

70

2.23

8.42

23Dec13

81.86

19.22

17.39

4.71

70

2.29

8.41

19Apr14

82.55

19.80

17.49

4.89

73

2.46

8.06

Financials

On a financial basis, the things I look for are the dividend payouts, return on assets, equity and investment. The company pays a dividend of 2.65% with a payout ratio of 53% of trailing 12-month earnings while sporting return on assets, equity and investment values of 8.8%, 29.4% and 14.1%, respectively, which are all respectable values. Because I believe the market may get a bit choppy here and would like a safety play, I don't believe the 2.65% 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 42 years at a 5-year dividend growth rate of 7%. Below is a comparison table of the financial metrics for the company for when I wrote all articles pertaining to the company.

Article Date

Yield (%)

Payout TTM (%)

ROA (%)

ROE (%)

ROI (%)

05Sep13

2.85

50

8.8

29.9

13.9

23Dec13

2.77

53

8.8

29.7

13.9

19Apr14

2.65

53

8.8

29.4

14.1

Technicals

(click to enlarge)

Looking first at the relative strength index chart [RSI] at the top, I see the stock bouncing off of oversold territory back on 19Feb14 and now nearing overbought territory as of today with a current value of 68.91. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line is above the red line with the divergence bars increasing in height, indicating some bullish momentum. As for the stock price itself ($85.55), I'm looking at $87.20 to act as resistance and the 20-day simple moving average (currently $83.26) to act as support for a risk/reward ratio which plays out to be -2.68% to 1.93%.

Recent News

  1. The company reported first quarter earnings on 17Apr14 of $0.83 per share on revenue of $12.62 billion. Both values beat estimates by $0.08 per share and $190 million respectively.
  2. The company has signed a deal with Senomyx (SNMX) to research products which allow food to have salty taste without actually having the salt. Pepsi will provide the funding for the research and in-turn will have non-exclusive rights to salt flavor modifiers.
  3. On the opposite side of the taste spectrum, the company has announced it will begin to market three new products as made with real sugar. The products shall be released later in the summer and may replace the "Throwback" initiative.

Conclusion

This quarter's earnings beat was helped by growth in the snack foods business which overshadowed weakness in the beverage segment. Fundamentally the company is fairly priced based on future earnings but expensively priced on future growth potential. Financially, the dividend is secured by earnings and has been growing at a modest rate the past couple of years. On a technical basis I believe the stock has hit a short term top right here. Due to the overbought technicals, fair valuation on next year's earnings, and low dividend yield I'm not going to be pulling the trigger on a batch of this particular name right now.

Disclaimer: This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: I am long PEP, SPY. 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.

Source: Pepsi Has Increased Dividends For 42 Years, But Is It A Buy Right Now?