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PepsiCo: The End Of An Era

Jun. 09, 2020 2:53 PM ETPepsiCo, Inc. (PEP)KO, MCD103 Comments

Summary

  • PepsiCo's revenues have been close to flat over the last decade but have improved in the last few years.
  • In its search for growth, the company has been disregarding profitability.
  • Higher prices with worse fundamentals make this a riskier investment than you might think.

Thesis Summary

PepsiCo (NASDAQ:PEP) is a household name offering a variety of consumer goods in the beverage and food sector. Despite little growth over the last 10 years, the company trades at a premium due to its recent performance. However, I don't expect this to continue. Pepsi does not offer a unique value proposition and has been losing profitability for a long time. With over ⅔ of revenue coming from the U.S. and a few retailers, the company is exposed to things out of its control.

Source: Blizzardwatch.com

Recent Performance

Pepsi sells and commercializes some of the best-known snack and beverage brands in the world. The company is responsible for Lays, Ruffles, Tropicana, and Quaker Oats. Due to the nature of its products, Pepsi is one of the few companies that have enjoyed a slight tailwind from the coronavirus due to people stockpiling drinks and food. Indeed, the company has had a decent quarter with revenues up by around $1 billion compared to the same quarter last year.

Source: 10-Q

Growth has been especially good overseas, with the company reporting 14% revenue growth for its European region. However, domestically it has been much less impressive, and the numbers look even worse when we begin to look at profitability. Furthermore, the company seems to be expanding aggressively, adding over $7 billion to its liabilities in the last year. This leaves me wondering whether Pepsi can sustain the recent levels of growth it has achieved over the next few years. And if so; at what price?

Growth or Profitability

While growth is important to investors, profitability and cash-making ability is certainly the biggest appeal with Pepsi. The company is a dividend king and currently offers a reasonable 3% dividend yield with an impressive track record of dividend growth.

But this could all

This article was written by

James Foord profile picture
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Comments (103)

DarwinIsMyHomie profile picture
Even when the bottom fell out in March ’20 PEP was priced near $103. That’s a P/E of around 19, not exactly cheap and still “overvalued” to many (if you accept P/E of 15 to 18 as fair valuation). With the Frito-Lay snack business this company has another revenue stream than just sugar water. I’d buy this Dividend Champion in a second if the price ever dropped into fair value territory.
terryongarland profile picture
Pepsi is a a company dependent on the US for revenue..and I have noticed their virtue signaling on tv ads..and support for BLM. Ok..yet do they realize that narrative is cravenly partisan and could also hurt business. BLM is not an organization of warm fuzzy thoughts..and their agenda is far from pure. Aligning with that organization is bad for business. When any business attaches itself to ideology it's risky.
Ta0 profile picture
@terryongarland
You can sell your shares. I'll buy it from you. 😁 People don't buy chips and a cold drink because of ideology. They buy it because it tastes good to them and they want a snack.

Also...what you said about being dependent on the US for revenue may be true...for now. All that means is---OMG 😵 they have an entire world to grow into...imagine the time when Pepsi successfully branches out!!!
craftbrewinfo profile picture
Pepsi's growth last quarter was all international
Ta0 profile picture
@craftbrewinfo
I hope it continues into the future and increases as more people around the world get exposed to it. I don't see why it wouldn't.
Vandooman profile picture
My long experience with PEP is that it tends to go sideways for extended periods as it adjusts its business but then will exploit something new and gradually increase in value. One or two year's performance doesn't necessarily indicate the longer term. This isn't the first time PEP has looked like this. I decided to hang in a few years ago and was rewarded, doubling my money and my yield on book is 6.4%. Sure beats a bond. I think I will again give them the benefit of the doubt while receiving very large dividends. Selling would entail very large tax payments so I would be reinvesting a much smaller amount than received. People tend to forget that. A heavy burden having large capital gains.
I'm a seller the second the divvy gets cut. Otherwise, go away and stop bothering me cuz I'm busy counting my money.
c
When Federal laws change, next move will be into Cannibis.
A product in high demand.
t
I think PEP under Nooyi was stagnating but ever since she stepped down PEP has been strengthening their product portfolio with, most recently, Pioneer Foods in South Africa. IMO Nooyi was too conservative and missed out of what would have been nice add-ons in their European business.

I do, however, still think they overpaid for Sodastream but, I guess, if you want an asset you pay the piper.
Dividend Power profile picture
I think criticism of Nooyi is unfounded. She was CE From 2006 - 2018. Revenue increased from ~$35B to ~$63B in the that time. Operating income increased from ~$6.5B to ~$10.5B in that time.
@teebeesee

agree on both sodastream comments
Ta0 profile picture
@Dividend Power @teebeesee
Female CEOs don't get as much respect because...well---they're female.
c
PEP is one of the few "valued" dividend stocks in the market today. I'm buying, but not backing the truck up just yet.
A
Coke tastes better but PEP stock is better because the company is diversified.
@Allegra3

Do the Dew! And the Div!
Baldy2000 profile picture
ALLEGRA3, Yes, I own a full pos in PEP. Much less of KO. But, KO is my soda of choice. PEP is definitely more diversified. Cheers
N
In Europe I believe the diet version of Pepsi is better than Coke Zero. I might be in the minority though.
craftbrewinfo profile picture
PEP blows away KO in terms of product line up and investabilty. It's not just soda here.. that Frito Lay business alone is a gold mine.. I've been looking to initiate a position since the pandemic , and I've added such quality to my portfiolio since March. This is the next name I want in my IRA to bolster my consumer descretionary.
Baldy2000 profile picture
Craftbrewinfo, PEP is a consumer staple. Cheers
l
KEEP MY DIVIDENDS ROLLING IN...😂😂😂😂😂😂, SHARE PRICE DROPS I'LL BUY MORE ALONG THE WAY.
M
Dividend aristocrat PEP, is a great company but overvalued at this time.
Lone Wolf Capital profile picture
Long time holder of PEP. It's been dependable for me. Sometimes I forget I own it. LOL
Dividends keep coming and get reinvested. I'm not ready to sell it yet.
benesole profile picture
All consumer product companies have the same retail concentration risk given retail trends. You would be hard pressed to find any of them that don't have the Walmart risk you call out. Seems unfair to hang that on pepsi :)
Zippy Research profile picture
I would actually argue that PEP's customer base is more diversified compared to other food companies:

SJM: 32% of sales from WMT (2019)
CAG: 24% (2019 annual report)
KHC: 21% (2019)
CPB: 20% (2019)
GIS: 20% (2019); was almost 10% higher before Blue Buffalo pet food acquisition
h
Who is this knuckle head? PEP is one of the best blue chips out there! Keep buying, management has it figured out. They are not dying! EVERYONE drinks something and they are one of the largest drink companies along with COKE. They have snack food so they buy something else someone is into at the time. They evolve into what needs to make us money. simple.
U
@hiltbra

"... the best blue chips..."

Not made by Frito Lay I think.
s
It's made me $ 300,000 over my 25 years invested in it. I handled the Walmart account for Frito Lay and they sell 300 million a month in chips alone. This done not include Pepsi, Quaker, Tropicana and bottled water.
U
I have read the comments below and most are 'bullish' on PEP. But I don't see any response explaining why the author's numbers are not relevant, e.g. 1/15 of /all/ their revenues come from WalMart. Shouldn't that be diversified? Etc.
Figure out what percentage 1/15 is and get back to us on that. I think you'll find that PEP is very diversified.
Overall good article. The rather thin margins of Beverages is pretty ugly. I knew Frito Lay was the company's real driver but...dang

In the recession scenario, I understand the logic behind the "priced at a premium/less disposable income" comment. I don't think Pepsico's products represent a large portion of people's incomes. If I get laid off, I am delaying large purchases such as a new car. I am not switching from Mountain Dew to "Mountain Lightning" - yuck (brand loyalty). I might order out less often.

The North American concentration is interesting. I know they are working hard in India.

"Top five retail customers accounting for 33% of sales" doesn't sound that concentrated to me. 67% of North American sales are in the hands of smaller businesses with far less bargaining power than Walmart's.

I think if you are going to talk long term trends, I think more than 3 years of data is needed.

Cheers
S
" would suffer greatly in a recession. " Would suffer less than most companies. PEP was around during many recessions, wars , terrorist attacks and now a pandemic and PEP never suffered greatly.
magi48 profile picture
When all the Baby Boomers die off (my self included) then PEP and MCD will die down.
Saltythedog profile picture
Doubt it. These companies will be around way past generation z is of senior age. Who doesn’t love fried potatoes and an iced cold sugar water?
Ta0 profile picture
I hate to say this, but my little nieces and nephews LOVE MCD food and PEP snacks and drinks (I say 'drinks' because they sell more drink types than just Pepsi). The youngest generation is just the newest generation that loves this stuff.
Adventureworldwide profile picture
Don't hate to say it, it's natural becasue it's invented and manufactured that way, as you say it's just the newest generation. BTW, if we all stopped investing in stocks of companies that we know aren't good for people we would own very few stocks, if any.
Steve Rasher profile picture
@The Value Trend Appreciate the article, but, although you raise some valid points as to potential weaknesses, I believe they are more hypothetical than real over the long term. I have owned $PEP since 1980 and my post-split cost is $2.39 and it now pays me an annual dividend of $4.09. Although past experience is not necessarily an indicator of future performance, I'll continue to hold. Steve
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