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PepsiCo: Improving Outlook But Shares Not Cheap Right Now

Mar. 02, 2020 2:49 PM ETPepsiCo, Inc. (PEP) StockKO6 Comments
Ploutos Investing profile picture
Ploutos Investing


  • PepsiCo saw another quarter of gross margin improvement in Q4 2019.
  • The company’s investments in marketing and advertising programs should help deliver long-term revenue growth.
  • Pepsi is currently trading at a valuation higher than its 5-year average.

Investment Thesis

Pepsi (NASDAQ:PEP) had a wonderful 2019 as the company saw its revenue increased 3.9% year over year. The company’s elevated marketing and advertising expenses will likely be resulted in operating margin compression in the near-term, but should help drive customer brand awareness. This should help improve its revenue growth outlook in the long-term. The company has recently increased its quarterly dividend by 7%. Its dividend yield of 2.8% is towards the low end of its yield range in the past 10 years. In addition, its current forward P/E ratio is higher than its historical average. Therefore, we only project a total return of 5.2% by the end of 2021. A pullback will provide a better opportunity.


Data by YCharts

Recent Developments: Q4 2019 Highlights

Pepsi delivered a solid Q4 2019 and ended its 2019 with strong results. The company saw its revenue increased by 5.7% year over year to $20.6 billion in Q4 2019. Its 2019 revenue reached $67.2 billion (or an increase of 3.9% year over year). Growth was mostly broad-based across different platforms. As can be seen from the table below, except its Quaker Foods North America (“QFNA”), its Frito-Lay North America (“FLNA”) and PepsiCo Beverages North America (“PBNA”) saw their revenues grew by 3% and 4% respectively. Outside of North America, growth was also broad-based. As can be seen from the table, LatAm (Latin America), Europe, AMESA (Africa, Middle East and South Asia), and APAC (Asia Pacific, Australia and New Zealand and China) also grew year over year.

Source: Q4 2019 Earnings Release

Growth and Earnings Analysis

Productivity savings and investments should continue to drive gross margin expansions

Pepsi has done well in 2019 to expand its gross margin. In fact, the company’s gross margin has expanded for 5 consecutive quarters (on a year-over-year basis). As can be seen

This article was written by

Ploutos Investing profile picture
I am a value focused investor. Stocks rise and fall for many different reasons that we often cannot predict. Eventually, it is those companies with a wide moat and the ability to generate cash flow that prevail. Therefore, my investment focus is to find value stocks that are able to generate cash flow, with sustainable dividends and provide growth over time. I focus my attention on analyzing large-capped dividend growth stocks, REITs and ETFs. I aim at providing a quarterly update and insights on stocks I follow. Please feel free to browse the articles that I wrote and provide any comments.

Analyst’s Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. 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.

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Comments (6)

xKaotic profile picture
Not cheap but when the price corrects 15% from its 52 week high, you can certainly add a bit more. Well that didn’t last long!
No it didn't but i did get some under 132.5 and 129.3 and that over 3% yield.
Dividend aristocrat PEP, is a great stock for DGI, but overvalued, wait for a better entry point.
Michael Dolen profile picture
I've only seen $PEP cheap one time in recent years and that was spring of 2018 at around $95. I bought. The timing ended up perfect on that one but even if it didn't, look at the long term. Almost any 5-year look back period would be a positive gain and that's excluding divs. Even if you bought at peak in 2007 the 5-year holding is essentially a break-even. Not bad for a worst-case scenario. Certainly better than a GE!

The point is that it's a slow growing and not sexy company, yet never a bad company to buy and hold for the long run.
yeah may 2018, got some then at 98 :)
Even with the dip, it's still pricey. I was hoping for a good entry point with all the fear in the market. Oh well.
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