Seeking Alpha
Long only, value, growth, dividend investing
Profile| Send Message|
( followers)  

Summary

  • The stock is expensively valued based on earnings growth potential.
  • The technicals for Pepsi appear to be bearish for the short term.
  • I put my proceeds into Goodyear which is extremely undervalued based on 2015 earnings estimates and earnings growth potential.

The last time I wrote about PepsiCo Inc. (NYSE:PEP) I stated, "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." During my quarterly portfolio change-out in mid-May, I decided to sell Pepsi out of the portfolio and replace it with The Goodyear Tire & Rubber Company (NASDAQ:GT) because I believe Goodyear is extremely undervalued and is in a hot industry right now. 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 4.34% excluding dividends (up 7.11% including dividends), and is losing to the S&P 500 (NYSEARCA:SPY), which has gained 14.78% 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 show why I sold Pepsi out of the consumer goods sector of my dividend portfolio.

Fundamentals

The company currently trades at a trailing 12-month P/E ratio of 19.36, 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 17.5 is currently fairly priced for the future in terms of the right here, right now. The 1-year PEG ratio (2.5), 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 7.73%. 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

23May14

85.58

19.36

17.50

4.89

73

2.50

7.73

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 3.06% with a payout ratio of 59% of trailing 12-month earnings while sporting return on assets, equity and investment values of 8.9%, 29.9% 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 believe the 3.06% 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 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

23May14

3.06

59

8.9

29.9

14.1

Technicals

(click to enlarge)

Looking first at the relative strength index chart [RSI] at the top, I see the stock dropping from overbought territory back on 28Apr14 with a current value of 50.29. I will look at the moving average convergence-divergence [MACD] chart next. I see that the black line is below the red line with the divergence bars decreasing in height, indicating some bearish momentum. As for the stock price itself ($85.64), I'm looking at $86.19 to act as resistance and $84.96 to act as support for a risk/reward ratio which plays out to be -0.79% to 0.64%.

Recent News

  1. The company announced it was going to get into the hardware business by releasing the Pepsi Spire, a new self-serve beverage dispensing machine. The company plans on using a bag-in-box system which will help boost margins.
  2. Trian Partners came out saying that the corporate bureaucracy at Pepsi has made the stock underperform of late. Trian is looking to break the company up to unlock value for shareholders.
  3. The company declared a quarterly dividend of $0.655, which is a 15% increase from the previous dividend. The ex-date is slated for 04Jun14 and payable on 30Jun14 for a forward yield of 3.07%.

Conclusion

I sold Pepsi for a 5.52% gain or 5.55% on an annualized basis. These are two different types of companies with Goodyear operating more in the rubber and plastics business and Pepsi operating on the soft drinks side of things. Fundamentally I believe Pepsi to be fairly valued based on next year's earnings but expensively valued on earnings growth potential, which is the main reason why I didn't really like the stock anymore. Whereas Goodyear is extremely undervalued on 2015 earnings estimates, earnings growth potential, and has almost double the earnings growth expectations. Financially I'm losing quite a bit of dividend but Goodyear has better financial efficiency management ratios. On a technical basis Pepsi seems poised for a drop down.

Because I swapped out Pepsi for Goodyear in my dividend portfolio it is only fair that I provide an update from the swap-out date. From 19May14, Pepsi is down 1.2% while Goodyear is up 0.93% and the S&P500 is up 0.95%. The trade has worked out so far but three days of trading is nothing to judge the swap-out by.

(click to enlarge)

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!

Source: Pepsi Increased Its Dividend 15% But I Sold Out Of The Stock