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PepsiCo's Premium Is Too Frothy

Mar. 06, 2020 7:17 PM ETPepsiCo, Inc. (PEP)16 Comments
Cash-Centered Creep profile picture
Cash-Centered Creep


  • PepsiCo reported a strong Q4 2019 and recently acquired Be & Cheery.
  • The firm has a strong portfolio of billion-dollar brands and an excellent dividend record.
  • It is currently overvalued.

PepsiCo's (NASDAQ:PEP) underlying business remains excellent, but nonetheless, this top-tier food snacks and beverage stock is one that I believe is currently trading at a premium to fair value.

Some bulls would argue that a company of PepsiCo's quality should trade at a premium and would cite the recent earnings report, released on 02/13/2020, as evidence for why it should. Non-GAAP earnings per share of $1.45 were in line with estimates, while GAAP EPS missed estimates by $0.13. Revenues of $20.64 billion beat estimates by $400 million. Overall, Mr. Market was bullish enough about these figures, as shares rose 0.63% in the 02/13/2020 pre-market.

Bulls can also point to the growth prospects that PepsiCo can look forward to as a result of its announced acquisition of Be & Cheery. The snack brand is being acquired from its owner, Haoxiangni Health Food, for $705 million. On the benefits that PepsiCo will derive from the acquisition, PepsiCo Greater China CEO Ram Krishnan stated:

Be & Cheery adds direct-to-consumer capability, positioning us to capitalize on continued growth in e-commerce, and a local brand that is able to stretch across a broad portfolio of products, through both online and offline channels...We also expect to leverage Be & Cheery's innovation and consumer insights capabilities to drive innovation in other key PepsiCo growth markets.

All told, the acquisition provides PepsiCo with access to the large Chinese consumer market which, despite present concerns connected to the ongoing coronavirus epidemic, remains a lucrative one long term. PepsiCo has effectively ensured that they will be able to continue generating strong revenue and net income, as they have over the past five years.

Year Revenue ($) Net Income ($)
2015 63.05 billion 5.45 billion
2016 62.8 billion 6.33 billion
2017 63.53 billion 4.86 billion
2018 64.66

This article was written by

Cash-Centered Creep profile picture
Buy and hold, common stock investor focused on dividends and on value. Interested in various stocks that are suitable for long-term dividend investment. A Buffett admirer, but not a Buffett cultist, and not quite as creepy as my name implies - though certainly cash-centered!

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