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Given consistent growth, Pepsi looks cheap at these levels

|Includes: PepsiCo Inc. (PEP)

Tim Biggam, TradingBlock  (September 13, 2011, 3:21 CDT)

Symbol Analyst Target Price Target Date
PEP 68.00 March 1, 2012

PepsiCo, Inc. (ticker: PEP) is a global food, snack and beverage company. Outside of Pepsi, 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 (NYSEARCA:PAF), PepsiCo Americas Beverages (PAB), PepsiCo Europe and PepsiCo Asia, Middle East and Africa (AMEA).

Shares of PEP have come down sharply over the past month, dropping from the 70 level to nearly 60. This puts the valuation of PEP shares at levels not seen since the early 1990s, with multiples now approaching 15. Given the steady and consistent growth in earnings displayed by Pepsi over the past 25 years, we feel PEP shares are becoming a value at these levels.

Additionally, PEP sports a 3.3% yield, approaching historic highs. Given the current interest rate environment, we like stocks that pay more than the 10-year Treasury yield of 2%, while displaying solid and consistent growth.

Technically, there is solid support around 60, while being very oversold on 14-day RSI basis, dipping below 20 recently. Over the last ten years, levels this oversold have only occurred two previous times, both of which occurred at major lows.

With P/E valuations near 25-year lows, a steady stream of earnings, a dividend yield of 3.3% and a solid technical backdrop, we look for PEP shares to reach 68 by March 2012. 

Play of the Day

 Based on PepsiCo's (ticker: PEP) current market price of $60.54 and using a target price of $68.00, a target date of March 1, 2012 and $1,000 of investment capital, below are three options strategies (ranked by potential profit) and a comparative stock trade to consider should the price target be achieved at the target date.

Click on the strategy name below to access trade details using TradeBuilder on Powered by TradingBlock's TradeBuilder.

Strategy (click for details) % Return at Target Probability of breaking
even or better
Buy Apr Call Spread +100% 51%
Buy Apr Call +90% 42%
Sell Apr Put Spread +55% 54%
Buy Stock +13% 59%

* Subject to change due to changing market conditions.

DISCLAIMER: This content is provided for educational and informational purposes only. Evaluate any strategy prior to use to understand risk and suitability. TradingBlock does not endorse or warrant any Market Analyst content, service or product. Use this content at your own risk without guarantee or warranty of any kind from TradingBlock. Tim Biggam is a TradingBlock registered representative. He is not compensated by TradingBlock for any market research or analysis services.