Company Description (Source: SEC 10-K)
Pepsico, Inc. (PEP) is a global food, snack and beverage company. The Company's brands include Quaker Oats, Tropicana, Gatorade, Lay's, Pepsi, Walkers, Gamesa and Sabritas. The Company is organized into four business units: PepsiCo Americas Foods (PAF), which includes Frito-Lay North America (FLNA), Quaker Foods North America (QFNA) and all of its Latin American food and snack businesses (LAF), including its Sabritas and Gamesa businesses in Mexico; PepsiCo Americas Beverages (PAB), which includes PepsiCo Beverages Americas and Pepsi Beverages Company; PepsiCo Europe, which includes all beverage, food and snack businesses in Europe, and PepsiCo Asia, Middle East and Africa, which includes all beverage, food and snack businesses.
Vital Statistics (Source: Google Finance)
- Recent Price: $63 (as of 02/22/2012)
- 52-Week Range: $58.50 - $71.89
- Market Capitalization: $98.80 Billion
- P/E Ratio: 15.67
- EPS: $4.02
- Yield: 3.24%
A 10-year summary of Sales, Earnings Before Interest and Tax (EBIT), Earnings per share (EPS), yearly high and low stock price, corresponding high and low P/E (calculated by dividing the high and low price by the EPS for the year), and average P/E (average of high and low P/E) is shown below.
Key 10-year data for Pepsico
Year |
Sales (in Billions) |
EBIT (in Billions) |
EPS |
High Price |
Low Price |
High P/E |
Low P/E |
Average P/E |
2011 |
66.5 |
8.83 |
4.03 |
71.9 |
58.5 |
17.8 |
14.5 |
16.2 |
2010 |
57.84 |
8.23 |
3.92 |
66.7 |
60.7 |
17.0 |
15.5 |
16.3 |
2009 |
43.23 |
8.08 |
3.77 |
64 |
48.5 |
17.0 |
12.9 |
14.9 |
2008 |
43.25 |
7.05 |
3.21 |
77.8 |
51.7 |
24.2 |
16.1 |
20.2 |
2007 |
39.47 |
7.64 |
3.43 |
78.5 |
62.5 |
22.9 |
18.2 |
20.6 |
2006 |
35.14 |
6.99 |
3.34 |
65.4 |
57.2 |
19.6 |
17.1 |
18.4 |
2005 |
32.56 |
6.38 |
2.39 |
60 |
51.9 |
25.1 |
21.7 |
23.4 |
2004 |
29.26 |
5.55 |
2.41 |
55 |
45 |
22.8 |
18.7 |
20.7 |
2003 |
26.97 |
4.99 |
2.04 |
48.5 |
38.3 |
23.8 |
18.8 |
21.3 |
2002 |
25.11 |
4.43 |
1.67 |
53.1 |
36.2 |
31.8 |
21.7 |
26.7 |
Source: MSN Money; SEC 10-Ks.
From these data, we can plot Sales, EBIT, and EPS versus Year, as shown in the chart below.
Sales (in Billions), EBIT (in Billions), and EPS versus Year for Pepsico, 2002-2011
As evident from the chart above, PEP has demonstrated quite predictable sales and earnings over the past 10 years, which allows us to project EPS in the near future, say in five years (i.e. Year 2016), using the logarithmic regression equation for EPS = 6.535E-83 * exp(0.09484*2016) = 7.0997. This projection assumes 9 percent annual EPS growth.
A conservative average P/E estimate for the stock can be obtained as follows:
Signature P/E: A well established stock has a signature P/E, an average P/E it commands in the market based on its business. We calculate this by averaging the Average P/E over the past 10 years, excluding any outliers (data points that fall significantly beyond the other data points). There are no significant outliers, so we average the Average P/Es from the past 10 years to arrive at a signature P/E of 19.9.
High P/E estimate: a conservative high P/E estimate can be calculated by averaging the five lowest High P/Es of the 10 High P/Es from the past 10 years. Averaging the 5 lowest High P/Es from the past 10 years gives 18.8.
Low P/E estimate: a conservative low P/E estimate can be calculated by averaging the five lowest Low P/Es of the 10 High P/Es from the past 10 years. Averaging the 5 lowest Low P/Es from the past 10 years gives 15.2.
Average P/E estimate: this takes the average of the High P/E estimate and the Low P/E estimate, as calculated above, to give a conservative estimate of an average P/E for the stock we can expect. Averaging 18.8 and 15.2 gives us 17.03.
Target Price
Multiplying our EPS projection for 5 years hence by the average P/E estimate gives us a projected average price for the stock: $7.0997 * 17.03 = $120.93, which represents an annual stock price return of 17.7 percent from the current price = $63. When we add in the 3.2 percent dividend yield, the total return expected is 20.9 percent a year, which means an investment in PEP today is expected to double in about 3-4 years.
Given a beta = 0.52 for PEP, a risk-free rate = 3% (using the yield on 30-year Treasury bond as a benchmark), and estimated risk premium of about 8 percent for the general stock market, we have a discount rate = 3% + 0.52*(8%) = 7.16%. Applying this discount rate of 7.16%, our projected price of $120.93 in 5 years translates to a target price = $85.58 in today's dollars. This is about 36% upside from the current price of $63, suggesting the stock is undervalued right now. For a good margin of safety, investors are well advised to buy only if the current price is at least 20% below the target price, which means a buy price of $68 or less.
Current P/E Compared with Signature P/E
The stock's current P/E should be compared with its signature P/E, since established stocks tend to revert back to their respective signature P/Es over the long term. The current EPS = 4.02, giving us a current P/E = 15.67. This is about 79% of the stock's signature P/E of 19.9, suggesting the stock is undervalued right now. To provide some margin for error, we should look to buy when the current P/E is 80% or less of the stock's signature P/E, so Pepsico is currently attractively priced relative to its historic P/E.
Pepsico's P/E Compared with Competitors' P/Es
It is helpful also to compare Pepsico's valuations with those of its competitors. Current P/E and Forward P/E are tabulated below for the company and its main competitors.
Stock |
Current P/E |
Forward P/E |
Pepsico (NYSE:PEP) |
15.67 |
14.26 |
Coca-Cola (NYSE:KO) |
18.78 |
15.46 |
Dr Pepper Snapple Group (NYSE:DPS) |
14.13 |
12.33 |
Kraft Foods (KFT) |
19.06 |
15.07 |
Nestle (OTCPK:NSRGY) |
15.52 |
17.43 |
General Mills (NYSE:GIS) |
16.43 |
13.69 |
Kellogg (NYSE:K) |
15.53 |
13.85 |
Mean |
16.45 |
14.58 |
Median |
15.67 |
14.26 |
Source: MSN Money.
Pepsico appears fairly priced compared to its competitors. Coca-Cola and Kraft trade at a premium, while Dr Pepper Snapple and Kellogg trade at a slight discount.
Historically, for the past 10 years, Pepsico has performed roughly in line with the market, outperforming the S&P 500 slightly, outperforming Kraft, but underperforming Coca-Cola, Kellogg, General Mills, and Nestle.
click to enlarge
Risk Index
Lastly, we calculate the Risk Index, calculated as (Current Price - Forecast Low Price)/ (Potential High Price - Forecast Low Price) to give an estimate of the risk: reward ratio. Risk index less than 20% is desired, which gives us +200% potential returns for every risk of 50% loss we assume.
The Forecast Low Price is calculated by multiplying the Low P/E estimate by the Forecast Low EPS, to give a conservative estimate of low price for the stock in 5 years, assuming zero EPS growth and low valuation. Forecast Low EPS is estimated by averaging the EPS over the past 5 years. For growth stocks with predictable earnings growth, EPS in 5 years should not be any lower than this conservative estimate. For PEP, the forecast low EPS is equal to 3.672, so the Forecast Low Price = 15.2 * 3.672 = $55.89.
The Potential High Price is calculated by multiplying the High P/E estimate by the projected EPS in 5 years, giving us a price in 5 years, should the stock command a high P/E. For PEP, this equals 18.8 * 7.0997 = $133.81.
Thus, the Risk Index = ($63 - $55.89) / ($133.81 - $55.89) = 9%. Since this is below 20%, the stock has a favorable reward to risk ratio at the current price.
Conclusion
Pepsico, Inc., currently selling around $63, has a target price = $85.58. The stock is currently selling at a discount to its historic P/E and also to its competitors. Upside potential appears to outweigh downside risk. Therefore, I rate the stock a buy at its current price.
Disclaimer: Use this information as a starting point for your own due diligence, before buying any stock. If you do buy, be sure to read any annual reports (10-K) and quarterly reports (10-Q) to ensure that the fundamentals remain good and the stock is on target to reach its projected price. After holding for five years, repeat the analysis detailed in the article to decide whether to continue to hold, add, or reduce your position. While I rate Pepsico a buy, there are also other stocks worth consideration right now, such as Becton-Dickinson , Walgreen (WAG), Walmart (NYSE:WMT), Target (NYSE:TGT), Microsoft (NASDAQ:MSFT), and Procter & Gamble (NYSE:PG). Adequate diversification, with no single stock or sector comprising more than 10-20 percent of one's portfolio, is essential.