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PepsiCo: Value with Safety

February 09, 2011 | About:
Alex Morris

Alex Morris

36 followers
When investors talk about value, the company generally imagined is small, under the analyst radar, and/or (if known) unloved. In the case of my pick for the GuruFocus Monthly Value Idea Contest, it seems to clash head on with these general assumptions. For starters, it certainly isn’t small or unknown; with revenues for FY2009 of more than $43 billion and a current market cap of roughly $102 billion, PepsiCo (PEP) is the 30th largest company (by market cap) in the United States. As for PEP being unloved, I’m less confident to categorize that answer. For value investors, PepsiCo has certainly been well liked over the past six months, with gurus Donald Yacktman, Jeff Auxier, John Hussman, and Mario Gabellli all adding shares (each of whom owns more than one million shares). On the other side, the business has taken some heat, mostly due to the declines of carbonated soft drinks sales in the United States (which fell 2.1% in 2009 and marked the fifth consecutive year of declines in the category) along with the headwinds of a global recession, which caused year over year revenues (2008 to 2009) to remain flat. As a result, while the S&P 500 has jumped forward 17% over the past six months and competitor Coca-Cola (KO) has hung on with a 10% appreciation in price, PepsiCo has sputtered, falling 3% over the same time period. On top of that, based on the company’s guidance given after Q3 2010, EPS for the year should rise between 11-12% to $4.21-4.24/share for fiscal year 2010, suggesting a P/E of roughly 15.2x at the current price of $64.15/share. This compares to Coca-Cola at 18.3x (based on just reported EPS of $3.45), Dr. Pepper Snapple (DPS) at 16.62x, and an industry average of 17.64x. While the problems presented from the decline in CSD’s and the global recession are well documented, I believe they are factually weak and fail to consider a couple of key trends; I believe their flawed rationale presents a value opportunity for long term investors with very limited downside risk (meaning permanent loss of capital).

The first thing to consider is that PepsiCo American Beverages (PAB), the business unit accountable for beverage sales (including RTD teas and coffees, sports drinks, juices, etc) in both North and South America accounted for $14.105B of the $39.683B in company revenues through the first nine months of 2010, equal to only 35.5% of total revenues (and 28.9% of operating profit). In reality, their chip/snack business (Frito Lay North America or FLNA) is more profitable than PAB, with operating profits of $3.26B vs. $2.17B in 2009. While PepsiCo may be known by their flagship brand, it is critical to realize that the relevance of CSD’s, while still important, is being mitigated over time with the expansion of other beverages and snack categories.

For the North American CSD business, the bottler acquisitions are another key point of recognition. Despite synergies (which are expected to exceed $400 million for the year 2012), I wouldn’t base an investment on potential savings. The point I wish to bring up is that PepsiCo has experience running the day to day operations from operating the Frito Lay snack business. As noted by CEO Indra Nooyi in March of last year, "The integration of the bottling companies into PepsiCo is going to be effortless because we know exactly how to operate a company where you've got to manage everything right [down] to the decimal point". In addition to the importance of managing costs in the mature CSD business, this will must sure costs are kept under check in growing categories as well. Based on the company’s success on the snack side, I expect the results from moving the bottlers in house to be beneficial to owners.

Any thorough analysis must include a look at the potential growth opportunities. Based on the 2010 EPS figure from above and fiscal year 2000 EPS of $1.51, PEP achieved EPS growth of 10.8% per annum over the past decade. That was during a period where the decline in CSD’s has already taken hold, along with the effects of a global recession at the end of the period. While that says a lot (and makes me optimistic), it doesn’t change the fact that the CSD business in the United States could easily continue to deteriorate. What will happen to future growth for PepsiCo in that scenario? Even though I think that outcome has been unrealistically extrapolated (by failing to adjust for industry innovation), I will play devil’s advocate and accept the continued decline of CSD volume in the United States. As I will discuss below, I believe that M&A, organic growth in international markets, Glocalization, and expansion into better for you products will be the key drivers of growth for PepsiCo over the next decade, and will lead to EPS expansion that outpaces the 10.8% growth since the turn of the century.

Ever since the merger of PepsiCo and Frito Lay in 1965, M&A has been a key part of the company’s growth. While some forays into “Diworsification” have occurred (like the purchases of KFC, Taco Bell, and Pizza Hut in the 70’s and 80’s), others, like the Tropicana and Quaker/Gatorade acquisitions at the turn of the century, have helped to develop the product portfolio that is currently driving PepsiCo profits. M&A in the past couple of years has been focused on developing the future of the beverage portfolio, especially outside of CSD’s and in international markets. One example is Lebedyansky, the largest natural juice producer in Eastern Europe, which was acquired by PepsiCo in March 2008. Not only does this give PepsiCo 42% of volume in the Russian juice market (home of 141 million people), but when coupled with the recent Wimm-Bill-Dann Foods acquisition (currently being completed) makes PepsiCo the largest food and beverage company in Russia. For the first nine months of the year, the company has achieved double digit increases in beverage volume and single digit growth in snack volume in Russia.

Organic growth also plays a key role in international growth. As YUM! Brands (YUM) investors would happily tell you, the company added more than 262 restaurants in China during the fourth quarter, and more than 500 throughout 2010; in aggregate, the company has more than 3,700 KFC’s and Pizza Hut’s in China, along with another 6,350 in emerging markets across 67 countries. At those 10,000 plus restaurants, the emerging middle class is being introduced to the PepsiCo product line each and every day (lifetime contract with PepsiCo). It’s like McDonald's (MCD) for Coca-Cola in the U.S., except that China has more than four times the population. Without delving into demographic/economic shifts in emerging markets, I think it is safe to say that PepsiCo will clearly benefit from this trend in the future. This is being reinforced by PepsiCo’s own push into AMEA (Asia, Middle East, and Africa), an operating unit that has reported net revenue growth of 19% through the first nine months of 2010 (to more than $4.5B).

Another aspect of this organic growth is being driven by the success of marketing and Glocalization efforts. A great example of this is the extension of Lay’s potato chip, the largest global food brand in the world. Worldwide sales for this brand exceeded $8.5 billion in 2009, and have grown at a CAGR of 13% over the past 25 years. PepsiCo’s savory snack share is almost unbelievable: 64% in the United States, 76% in Mexico, 62% in Russia, 44% in the UK, 39% in India, and the leader in market share in 31 other countries in which they compete. How has PepsiCo been able to replicate their domestic success in international markets? They have gave consumers what THEY want, not what WE want. Examples include red caviar flavored chips in Russia, chili limón chips in Mexico, and soft shell crab flavored chips in Thailand. Following a similar strategy has made Ruffles the #1 savory snack in Brazil, where revenues and net operating profit before taxes have increased 3x and 10x, respectively, in less than six years; as a reference, per capita core savory consumption is still only 1/3 of Mexico and 1/10 of the United States in Brazil.

The continued success of PepsiCo in marketing and product development is well documented; in 2009, they had the highest amount of new product sales out of any company in the industry in North America ($536M). The company currently has 19 brands that have retail sales in excess of $1 billion, compared to only six in 1990 and one in 1980. Fast Company recently ranked Frito Lay the most innovative food company in the world, attributing 12 of the top 20 snack innovations of 2009 to the company. Many of these brands are currently sitting in the $250M-$1B sales range (roughly 15 brands), and will be the future $1 billion brands of PepsiCo. Continued innovation (like Trop50, which achieved over $100M in revenues in its first 12 months) and Glocalization (like the soft shell crab flavored chips) is the reason why of the $180 billion global macro snacks market, PepsiCo commands a 17% share; expect for this to continue to grow as they expand into adjacencies (things like nuts and dips/spreads, which they have already started doing in places like Brazil and at your local grocery store).

The expansion into healthier (called “better for you”) products is also a strategic shift for the company. Since the recent Wimm-Bill-Dann acquisition, this category accounts for roughly $13 of net revenues, and achieved top line annual growth of 10% over the past three years. As CEO Indra Nooyi has recently noted, the company’s goal is $30B in revenues from this category by 2020, implying 11.6% top line growth per annum in better for you products (from the base $10B). On top of these new categories, look for PepsiCo to focus on nutrition as an aspect of CSD/savory snack development. While this growth with mostly be non-organic, there are some opportunities from the current portfolio.

In 2010, the company converted their entire Lay’s Kettle business and Lay’s flavors business to 100% all natural, meaning no artificial colors, no preservatives, no artificial flavors, and made with all natural ingredients. As noted by PepsiCo America Foods CEO John Compton, “We have talked extensively to consumers about this idea, and they come back and tell us the number one motivation for purchase is products that claim to be all natural.” The Lay's potato chip business has grown roughly 8% since the all natural rollout, compared to a food and beverage category that has booked less than 1% growth. On top of that, Lay’s grabbed an additional 1.7 share points during that same time frame, which is impressive expansion in the highly competitive potato chip segment. Based on this early success, PepsiCo is set to make a big push into all natural in 2011. The platform will be expanded to include Tostitos, Sun Chips, and Rold Gold, as well as Fritos in the back half of the year. When all is said and done, more than 50% of the Frito-Lay portfolio will be launching all natural next year. This shift has helped to draw in a crowd that tends to avoid “junk food”. As noted by Mr. Compton, “...the purchase intent went up for heavy users, medium users, and importantly, light users who tend to come and go from the category.” The company also launched the first natural mainstream CSD with Sierra Mist Natural in the past six months; while it is still early to tally the results from this endeavor I think it is safe to say that PepsiCo will continue moving in a direction that looks to satisfy health conscious consumers.

Besides these business/strategy advantages, the company is also shareholder friendly. From 2002 to 2009, the company returned $37 billion to shareholders through buybacks and dividends. With a current dividend yield of roughly 3% (the dividend has doubled ever six years since 1978, on average) and an earnings yield of 6.58%, the total yield at the current valuation is roughly 9.58%; this compares to a current ten year bond yield of 3.65%. So you are essentially receiving 3x as much earnings for the same amount of investment on two securities that I would personally consider to be of comparable risk. With that being said, 10 year T-bills are probably the last place you want to be right now, so choosing PEP stock as an alternative is not the best measure of value.

PepsiCo is not a place to look for a quick 50% gain. But this is the kind of investment where you can park your capital for 5-10 years and expect to achieve 10-12% per annum with limited risk. Based on PepsiCo’s current position and the recent moves that they have made in securing long term share in emerging markets, I think that there is no reason to expect PEP to trade below the industry average considering an average ROE in the low 30’s and an average ROA in the mid/high-teens over the past ten years; in fact, the current P/E is lower than the low P/E reached from 2000-2007. As noted in the paragraphs above, the justification for this is weakening with each strategic change management makes, and with every long term investment that has the potential to become the company’s next $1 billion brand. The catalyst for the multiple expansion is continued success in driving international growth and successfully leveraging the advantages of moving the bottlers in-house.

If the stock was to reach the industry average multiple of 17.64x, the price would increase $10.27/share, or 16% from today’s quoted price. To me, that would be a very nice short term gain considering the rare chance of permanent loss of capital.

This analysis has focused on the business and the strategic direction rather than on specific forecasting. The basis for the value play (in the short term) is based on comparables with historical multiples and industry/competitor multiples, which are far from flawless. More importantly for true investors, the basis for value in the long term is the company, the management, the brands, and the people.

Competitors, as always, will be there trying to take share. The near duopoly with Coca-Cola in beverages and clear leadership position in key markets in savory/salty snacks are the competitive moats that management must continually defend at all costs. On top of that, management has it's eye on expanding share in adjacent categories, a move that could add to the moat in the coming years. Recent marketing projects, like the Pepsi Refresh and Crash the Super Bowl advertisements have done a fantastic job of creating a connection and feeling for the brand, especially among younger consumers. I personally think long term value investors will be handsomely rewarded for buying shares of PEP and holding them for the next 5-10 years (barring 30/40/50x multiples on large caps like in 2000; in that case, sell all your stocks and buy some far out index puts).

About the author:

Alex Morris
I am a recent graduate from the University of Florida; I received a finance degree as well as a real estate minor during my time at UF. I will be sitting for Level 1 of the CFA Exam in December 2011, as well as for my series 65 exam. I am a value investor, plain and simple.

Rating: 4.5/5 (40 votes)

Comments

clemo69
Clemo69 premium member - 3 years ago
Excellent analysis. Thanks
Alex Morris
Alex Morris - 3 years ago
Clemo69,

Thank you, very much appreciated.
jacknhw
Jacknhw - 3 years ago


Very informative article, but when I look at PepsiCo everything looks great but then I look at how much debt they have taken on. Seems like most of it was due to the acquisition of PBG and PAS, what is your opinion regarding their debt?
Alex Morris
Alex Morris - 3 years ago
Jacknhw,

Thanks for the comment. From looking at the balance sheet released this morning, we can see that long term debt is nearly $20 billion. As you noted, the acquisition is the reason why this account has ballooned in the past 12 months (up from roughly $7 billion at the same time last year). While I generally avoid debt like the plague, management is doing it for a very specific reason: investments for the future. The bottlers cost a pretty penny, along with Wimm-Bill-Dann and the Lebedyansky acquisition from 2008 (plus small add on M&A).

I think it is important to differentiate between Microsoft type debt (taken simply to avoid costs associated with bringing money from overseas to the US) and debt being used as a lifeline for a struggling business. PepsiCo (IMO) fits in the first category; they are taking on low cost, long term debt to invest where they see opportunity. The AA- Morningstar rating is a testament to this.

In the corporate credit environment that prevailed through much of last year, this worked very much to PEP's advantage; every issue was roughly 50-100 basis points above the respective U.S. treasuries (depending on maturity), at a time when treasuries were paying low yields.

From my perspective, this is more about investment opportunities. I am not the least bit worried about the current debt on the balance sheet for PEP, but will enjoy seeing it diminish over the coming years.
jacknhw
Jacknhw - 3 years ago


That makes sense, again, very informative. Do you know why most of these Wall Street guys are predicting the P/E to decline towards the average P/E of the S&P 500? Why would they look at such a large category and not compare it to the industry P/E that is higher than PEP?
Alex Morris
Alex Morris - 3 years ago
Jacknhw,

Thanks for the comment. I'm not sure exactly what Wall Street guys you are referring to (want to clarify which report? I have access to most of the big ones), but I would take a guess as to why: commodity costs. PEP was clear on the call: despite commodity cost increases (which are expected to be higher to the tune of roughly $1.5 BILLION for 2011 and represents an 8-9% commodity cost increase YOY), they are still seeing issues in their key developed markets (high unemployment in the U.S., for example). Management has come out and said we will not simply pass through the costs; the consumer is not strong enough right now to absorb the pricing.

Could they push those costs through? Sure. Would that move lead to competitors, including private label, picking up share? Most likely. Would it damage the long term value of the brand? It could for some consumers. Personally, I'm more than happy that management is willing to sacrifice margins for next year to maintain the strength of the unique brand equity they possess, and continue to maintain or possibly grab value share from smaller competitors who can't take the costs on the chin.

Why are "Wall Street guys" predicting P/E multiples decline to S&P 500 average? That's a good question. This business will grow core EPS 7-8% next year (if you trust managements view), and consistently drive high single digit/low double digit EPS over the next decade. In this environment, I think that deserves a premium over a market that is expected to deliver (depending on who you ask of course) low single digit returns over the next decade (which I would assume implies consistent multiples and reflects earnings growth).

The important thing to always remember is that analysts (for the most part) could care less about the long term. They want to get the call right over the next 2-3 months. A great example is Credit Agricole equity research analysts: in December, they boosted their price target on to $80/share; 3 months later, with no major changes, they downgraded PEP to "under perform". I would be willing to bet this has to do with short term commodity cost issues. If PEP suffers short term declines in margins while maintaining customer loyalty, I will be more than happy to buy more shares to add to my long term holdings. Let me know if anything was unclear in there. Thanks again for the comment.
jacknhw
Jacknhw - 3 years ago
Thanks for your reply. I understand the commodity cost issue, but like you mention the guidance was 7-8% EPS growth next year, and I did notice that some say that their forward multiple is justified because they believe that Pepsi should trade at a premium (but compared to the S&P500 as a whole). Morgan Stanley, Goldman, BOAML all project declining multiples into 2012 (high 12 to low 13) but they seem to agree with the guidance that Pepsi gives. Only thing I can think of is perhaps Pepsi is trading at a high PEG ratio and based on that they believe it's too expensive, especially with them lowering their guidance.

I do agree that not pushing costs through to the consumer is a great thing at the moment. One thing that also concerns me about both Pepsi and Coke is their declining margins over the years. Do you think that translates into both of them seeing increasing competition? I know if I buy soda these days at the super market it's usually the generic diet grocery store brand and I've been eating less chips, I don't know maybe there are others that are doing just the same out there.
Alex Morris
Alex Morris - 3 years ago
First things first:

"Only thing I can think of is perhaps Pepsi is trading at a high PEG ratio and based on that they believe it's too expensive, especially with them lowering their guidance."

But based on what time frame? Why they would assume a multiple of 12-13 when the 5 year average P/E has been 19.8?

Let's assume we live in a simple world and their are only 2 outcomes: either we continue to face headwinds, or everything is good in 12 months (very simplistic, but just for sake of argument). The first case scenario is what they have projected: 7-8% in 2011, followed by high single digit core EPS growth. How about the second scenario? I believe in that case you are looking at low double digit EPS growth (10-12%). When you add in your dividend payments of 3% (safe we can agree those aren't disappearing any time soon), the range in total yield is 10-15% per annum. Considering the stability of the business, I personally believe yields in this range deserve a premium over the market as a whole.

(By the way, MS has a price target of $83 as of 2/3/2011)

Second thing:

"I know if I buy soda these days at the super market it's usually the generic diet grocery store brand and I've been eating less chips, I don't know maybe there are others that are doing just the same out there."

This is definitely a concern and something that has hurt brands during the downturn; according to a McKinsey survey in 2010, 75% of consumers who traded down to private label in 2010 say they won't switch back. While their is certainly a difference between what people say and do (when their flush with cash again they might be willing to splurge for certain brands), some of these consumers will not come back. Without any specific data in front of me, I feel confident that PEP, KO, and DPS will have less trouble with this than many others in the grocery store (take Dean Foods with milk for example).

The switch due to the nutritional aspects (the chips comment) is something I am more confident on; this is essential the question mark answered above about the decline in United States CSD sales. Innovation (like all natural sodas and chips) along with brand extension (Tropicana is the epitome of this with items like Trop50) and tag on M&A will drive success in the better for you category. These are the changes that will help PEP hit $30 billion in revenues for "better-for-you" by 2020.

Not sure if I really answered your questions... Let me know if there are any other questions/comments. Thanks for the good discussion.

jacknhw
Jacknhw - 3 years ago
Sorry Alex, really dumb mistake on my part, those were forward P/E ratios! But here is a question for you, for TTM what would you consider the highest PEG ratio you would be able to stomach?

My wife loves Trop50 and G2. I'd be willing to spend for those they are great products!

I'm liking KFC's growth in China vs. McDonalds, a big benefit to Pepsi.

You seem to be well informed, what websites/newspapers you like to read? Also how many companies do you follow?
Alex Morris
Alex Morris - 3 years ago
Jacknhw,

No problem on the mistake; explains a lot though! As far as PEG, I think a good rule of thumb (which I believe I got from Peter Lynch?) is an upper limit of 2. More importantly for me is the stability of the G input; that is why PEP is so attractive to me. The 10.8% EPS growth per annum over the past decade wasn't a fluke, and I see no reason why the performance cannot/will not be repeated (current macroeconomic headwinds aside). This may be a personal bias from reading people like James Montier, but I am very skeptical of the long term performance (as a whole) of growth stocks. Based on the research I have seen, low P/E, low P/B, etc (the major metrics used in determining value) has significantly outperformed growth (indicated by huge YOY EPS growth and high P/E's). Reading enough of Montier has led me to look at growth and (99% of the time) think "no thanks".

I read the following newspapers:

Financial Times

New York Times

I read the following websites:

GuruFocus

SeekingAlpha (for the transcripts)

GoogleNews (good collection of respected sources top articles)

BeverageWorld

GMO letters/articles (GREAT SOURCE)

On top of those, I read as many books as possible. In the middle of reading "The Myth of the Rational Market", and then probably going to run through "Security Analysis" again; excited!

Hopefully that gives a good run over. Let me know if there are any more questions/comments. Feel free to email me in the future with anything you would like to discuss. Thanks.
teidelman
Teidelman premium member - 3 years ago


Hi Alex,

It is a good analysis, but I just wanted to point one thing out for the future. Your total return analysis is incorrect when you say "With a current dividend yield of roughly 3% (the dividend has doubled ever six years since 1978, on average) and an earnings yield of 6.58%, the total yield at the current valuation is roughly 9.58%;"

Don't forget that the dividend comes out of earnings, so you are double counting the dividend. Some people estimate EPS growth and then add the dividend yield for a total return estimate. Don't mean to take away from your solid analysis.

-Tom
Alex Morris
Alex Morris - 3 years ago
Tom,

Thank you for the comment. I am here to learn, and am happy that others with a better understanding of something point out flaws in my reasoning. Based on what I've said my expectations are (similar EPS growth of last ten years, so roughly 10%), would a correct total yield be around 13%? Am I looking at that right?

If you have any good sources (websites, books, articles, etc) I would love to know about them. I have found limited resources on the topic, but know that it is used by value investors with phenomenal knowledge like Bruce Greenwald. Thanks again for the comment, look forward to your response.
jacknhw
Jacknhw - 3 years ago
Alex,

I think you are thinking in terms of total return (price appreciation + income yield). If the earnings yield stays constant, then perhaps that is to say that the rate of price appreciation matched that of the earnings growth. So saying that you have a 10% earnings growth and that relationship holds, then you can say that you have a 10% price appreciation. Take that price appreciation and add that div yield and you got yourself a 13% total return.

Good books to read are the CFA books!
jacknhw
Jacknhw - 3 years ago
I'm also assuming the the dividend payout ratio stays constant
cm1750
Cm1750 premium member - 3 years ago
I noticed the mention of PEG ratios. IMHO, PEG ratios are simple(ton?) rules of thumb more relevant for growth companies and less so for slow growing companies. PEG is not a linear relationship and depends on the magnitude and duration of the growth rate which is guesswork for most companies.

For stable companies like PEP, KO, PG, PM etc., I prefer to look at them as an owner of perpetual FCF machines. PEP had 5-6% trend line FCF growth over the past 5-10 years.

Going forward, if you conservatively assume 2.75% global unit growth, 1.5% "realized" price increases (hurt by input cost growth) and slight operating margin expansion, you get 4.375% FCF growth.

Assuming PEP has 84% FCF/net income ratio and using the perpetual FCF growth model 1/(r-g) where equity return (r) is 9.5%, the stock should trade at 16.4x 2011 $4.44 EPS. This assumes all retained cash flow is reinvested at cost of equity (likely conservative).

This leads to a current value of $73/share vs. the current $64.

At the current $64, this implies a perpetual 10.25% equity return backsolving for r. If I can get 10.25% returns for the next 10+ years, I will take it.

Using Yacktman's method, you can take the 5.83% 2011 FCF yield and add the FCF growth rate of 4.375% to get a similar 10.21% perpetual return.


jacknhw
Jacknhw - 3 years ago
That makes sense about the PEG ratio, probably should only be used for high growth companies.
teidelman
Teidelman premium member - 3 years ago


Alex,

As Jacknhw also said, if PEP can achieve its historical 10% eps growth and 3% dividend yield (assuming the PE stays the same), the expected return would be 13% per year. I don't have any specific resources that I can think of for this particular calculation other than to say I learned it on the job. Taking this a step further, given the quality of pepsi's business, historical trading multiples, peer valuations, general market valuations, and low interest rates, I think PEP deserves a a higher PE multiple. If PEP's multiple expands from the current 15.4x to 20x, this would add an additional 30% return depending on how fast the multiple expands.
Alex Morris
Alex Morris - 3 years ago
Teidelman,

Thanks for the comment and the clarification. It only makes sense that the expected return will naturally fall in line with EPS/dividend growth (without multiple expansion). As you noted near the end, P/E expansion to the high teens (like KO on 2010 minus one time items) could definitely mean some nice sized returns for investors. As Ron Baron noted in the his recent annual shareholder letter, he learned something from Tony Tabell, the former principal at investment firm Delafield: "You make the most money when earnings multiples change, not just when earnings increase." I'm not searching for the most money, but definitely have my eyes set on solid returns. Thanks again for the comment.
billspetrino
Billspetrino - 3 years ago
Great company but the price needs to be a bit lower

Like the CEO though
Lothario
Lothario premium member - 3 years ago
I don't get what the attraction to the stock is.

PEP seems to be worth about $47-51.

The same for KO...

Probably worth about $41-45.

Maybe I'm just being overly conservative as usual again and I also didn't do comparisons to their avg industry valuations.

PEP is definitely cheaper than KO (both their stock and the taste of their soft drink products)...I'll give you that. ^_^
Alex Morris
Alex Morris - 3 years ago
Lothario,

Thanks for the comment. I agree that it would be more attractive around $50/share, and wish it was March 09 today (at least in the sense of stock prices). Based on what I have forecasted (simple DCF with a couple different growth rates based on past results), that range would be right around 15% per annum; in this area, it is closer to 12%. These are based on the arguments I made above. The safety of the investment is what I see as the extra kicker, but that is simply my assessment. If we get back to $47-51, I will be there buying every PEP share I can afford.
cm1750
Cm1750 premium member - 3 years ago
Lothario,

Can you share your basic calculations for fair value of $47-51 for PEP and $41-45 for KO?

My PEP calculation above ($73 fair value) is using a FCF analysis which I feel is the most objective way if looking at PEP as an owner.

Given higher input costs, U.S. CSD market share issues, WBD integration risks and reduced share buybacks, PEP shares may languish in the short term even though it is undervalued.

apolloportfolio.com
Apolloportfolio.com premium member - 3 years ago
The article is great! I personally think that holding PEP for long term is a smart move. However, I am wondering whether you might consider other big cap with similar attractive argument, such as TEVA, WMT, MSFT, JNJ, etc. Honestly, the stock market is very competitive. Although PEP is very attractive, we have to make the buy call relative to what the market offers. There might be even more lucrative picks, other than PEP. What's your take?
Alex Morris
Alex Morris - 3 years ago
ApolloPortfolio.com,

Thanks for the comment! Would have to agree with you, PEP for the long term!

In regards to your other big caps, I own two of the four, and am very close to making it three. So the answer to that question is "yes, I would".

"Are there more lucrative picks than PEP?"

Yeah, I think so. But I also think this is a great company at a fair price, and I have no problem growing with the business over time. The thing to avoid is buying something you don't understand because it looks "cheap" based on a P/E or P/B basis, or from a DCF model, etc. I will only buy stocks that I am more than happy to see fall by 10, 20, or 30%. The great businesses are the ones you love to see in the gutter so you can stock up on more.

If you can stay emotionally separated from the market and buy great companies when they are cheap (regardless of what the "end of the world" prediction is this time around), you will do fantastic with your investments over a long period of time; this is EXACTLY what I am shooting for.

Thanks again for the comment.
apolloportfolio.com
Apolloportfolio.com premium member - 3 years ago
Thanks so much for your quick response!

Just wondering which other 2 you held out of the 4 I mentioned! I bet those two might be MSFT and WMT.

Thanks on behalf of www.apolloportfolio.com!

Alex Morris
Alex Morris - 3 years ago
ApolloPortfolio.com,

Actually, they are JNJ and MSFT, close though. WMT is the third that I'm watching :)
apolloportfolio.com
Apolloportfolio.com premium member - 3 years ago
Be very honest. I have bought JNJ before. I know that JNJ is a solid company. But I have made a call to buy ABT when it is about $45.6 pretty much the lowest point. Anyway, my point is that I will buy ABT instead of JNJ.

More analysis can be performed. If you are interested, you might do a comparison between ABT and JNJ. However, I personally think that ABT will be better than JNJ. That's why I didn't pick JNJ when I know you held 2 of the 4 strong companies.

Thanks on behalf of www.apolloportfolio.com!

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