PepsiCo: [NYSE:PEP] Jan. 12, 2008 (9:45 AM: $51.98)
52-week range: $49.74 (Nov. 21, 2008) - $79.79 (Jan. 10, 2008)
Latest Quarterly Payout = $0.425 = 3.27% current yield
PepsiCo has four main business divisions- Frito-Lay North America, PepsiCo Beverages NA, Quaker Foods NA, and PepsiCo International. 2008 will be the 14th year of the past 16 to show increased EPS and the seventh straight year of rising sales per share. Cash flow, book value and dividends paid will all finish 2008 at all time highs.
The balance sheet looks great with $1.859 billion in cash on hand as of September 6th – an amount that handily exceeded the total short term debt due within the next five years. Value Line rates PEP’s financial strength as an ‘A++’ their highest rank. Value Line also rates PepsiCo in the 100th percentile in both ‘stock price stability’ and ‘earnings predictability’ [with 100 being best]. Beta is a very low 0.6. PepsiCo’s ROE has ranged between 26.8% and 37.7% in each of the past 11 years.
PepsiCo is a true dividend aristocrat with 36 consecutive years of increased payouts. The horrendous bear market of 2008 has knocked these high quality shares down to where today’s yield is almost twice its historical average. Buyers at Friday’s close were getting 3.08% based on the prior 12 months and an estimated 3.27% on the expected year-ahead dividends.
Here are PEP’s per share figures as reported by Value Line since 2002 when the restaurant division was spun off as Yum Brands. 2008 data includes Q4 estimates.
Year …… Sales ……. C/F …..… EPS …… Div…...… B/V …… Avg. P/E
2002 ……14.58 ……2.68 …… 1.96 …… 0.60 ….. 5.37 …….. 23.6x
2003 ……15.82 ……2.81 …… 2.05 …… 0.63 ….. 6.94 …….. 21.5x
2004 ……17.43 ……3.14 …… 2.32 …… 0.85 ….. 8.03 …….. 22.1x
2005 ……19.66 ……3.65 …… 2.69 …… 1.01 ….. 8.58 …….. 20.6x
2006 ……21.45 ……3.95 …… 3.00 …… 1.16 ….. 9.36 …….. 20.4x
2007 ……24.59 ……4.38 …… 3.34 …… 1.43 …..10.71 ……. 20.5x
2008 ……27.77 ……4.72 …… 3.67 …… 1.60 …..10.90 ……. 17.7x
At the current price of $51.98 PepsiCo’s P/E is just 14.2x trailing and < 13.4x 2009 projections of $3.88 /share. At its dead low share price in 2002’s bear market PEP shares troughed at 17.4x that year’s earnings. Buyers back then saw their shares climb from $34 to $55.70 over the next 20 months and to $79 by late 2007.
A return to even a 17 multiple on year-ahead expected earnings leads me to a 12-month target price of about $66 or plus 26.9% from today’s quote. Add in the 3.27% yield and a total return of over 29% looks achievable. How does that compare with the rates now available on T-bills and CDs?
Is that $66 goal price reasonable? PepsiCo shares touched highs of $66, $79 and $79.80 in 2006-2007 and 2008 respectively, all when fundamentals were not as good as they are presently.
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If you’re nervous about the market but want to play PepsiCo with reduced risk, here’s a nice option combination:
……………………………..........................…………. Cash Outlay…................…….Cash Inflow
Buy 1000 PEP @ $51.98 ………................…..… $51,980
Sell 10 Jan. 2010 $60 Calls @ $3.10 ……….................................……………….. $3,100
Sell 10 Jan. 2010 $50 Puts @ $6.30 …...............................……………………... $6,300
Net Cash Out-of-Pocket ………….............................………….…. $42,580
On expiration date (Jan. 15, 2010):
If PEP shares are $60 or higher (+ 15.42% or better from today’s price):
Your shares will be called [sold] for $60,000.
Your $50 puts will expire worthless (a good thing for you as a seller).
You will have no further option obligations.
You will have $60,000 plus $1600 in dividends (at last year’s rate).
You will have $61,600 for your original net cash outlay of $42,580.
That’s a cash-on-cash total return of 44.6% in less than 12.5 months.
On shares which only had to rise by 15.5% (from a very depressed level).
If PEP shares are unchanged from today’s price:
Your $60 calls will expire worthless.
Your $50 puts will expire worthless (a good thing for you as a seller).
You will have no further option obligations.
You will own 1000 shares worth $51,980.
You will have collected $1600 in dividends (at last year’s rate).
You will have $53,580 for your original net cash outlay of $42,580.
That’s a cash-on-cash total return of 25.8% in less than 12.5 months.
On shares which did not go up.
What’s the risk?
If PepsiCo shares are under $50 on expiration date you will be forced to buy an additional 1000 shares and put up $50,000 more cash.
Your break-even on the original shares would be their cost of $51.98 less the $3.10/share call premium = $48.88/share.
Your break-even on the puts is the $50 strike price less the $6.30/share put premium = $43.70.
Thus the net break-even price on the whole trade would be the average of those two prices or $46.29/share.
Nobody can assure you that PepsiCo shares will not be lower than $46.30 by expiration date. I can tell you that they haven’t traded that low since early in 2004 when EPS, dividends, book value etc. were all substantially below today’s values.
Your worst case scenario would be to own high quality, low risk and good yielding shares near their 5-year absolute low price.
Disclosure: Author owns shares and is short options on PepsiCo.
52-week range: $49.74 (Nov. 21, 2008) - $79.79 (Jan. 10, 2008)
Latest Quarterly Payout = $0.425 = 3.27% current yield
PepsiCo has four main business divisions- Frito-Lay North America, PepsiCo Beverages NA, Quaker Foods NA, and PepsiCo International. 2008 will be the 14th year of the past 16 to show increased EPS and the seventh straight year of rising sales per share. Cash flow, book value and dividends paid will all finish 2008 at all time highs.
The balance sheet looks great with $1.859 billion in cash on hand as of September 6th – an amount that handily exceeded the total short term debt due within the next five years. Value Line rates PEP’s financial strength as an ‘A++’ their highest rank. Value Line also rates PepsiCo in the 100th percentile in both ‘stock price stability’ and ‘earnings predictability’ [with 100 being best]. Beta is a very low 0.6. PepsiCo’s ROE has ranged between 26.8% and 37.7% in each of the past 11 years.
PepsiCo is a true dividend aristocrat with 36 consecutive years of increased payouts. The horrendous bear market of 2008 has knocked these high quality shares down to where today’s yield is almost twice its historical average. Buyers at Friday’s close were getting 3.08% based on the prior 12 months and an estimated 3.27% on the expected year-ahead dividends.
Here are PEP’s per share figures as reported by Value Line since 2002 when the restaurant division was spun off as Yum Brands. 2008 data includes Q4 estimates.
Year …… Sales ……. C/F …..… EPS …… Div…...… B/V …… Avg. P/E
2002 ……14.58 ……2.68 …… 1.96 …… 0.60 ….. 5.37 …….. 23.6x
2003 ……15.82 ……2.81 …… 2.05 …… 0.63 ….. 6.94 …….. 21.5x
2004 ……17.43 ……3.14 …… 2.32 …… 0.85 ….. 8.03 …….. 22.1x
2005 ……19.66 ……3.65 …… 2.69 …… 1.01 ….. 8.58 …….. 20.6x
2006 ……21.45 ……3.95 …… 3.00 …… 1.16 ….. 9.36 …….. 20.4x
2007 ……24.59 ……4.38 …… 3.34 …… 1.43 …..10.71 ……. 20.5x
2008 ……27.77 ……4.72 …… 3.67 …… 1.60 …..10.90 ……. 17.7x
At the current price of $51.98 PepsiCo’s P/E is just 14.2x trailing and < 13.4x 2009 projections of $3.88 /share. At its dead low share price in 2002’s bear market PEP shares troughed at 17.4x that year’s earnings. Buyers back then saw their shares climb from $34 to $55.70 over the next 20 months and to $79 by late 2007.
A return to even a 17 multiple on year-ahead expected earnings leads me to a 12-month target price of about $66 or plus 26.9% from today’s quote. Add in the 3.27% yield and a total return of over 29% looks achievable. How does that compare with the rates now available on T-bills and CDs?
Is that $66 goal price reasonable? PepsiCo shares touched highs of $66, $79 and $79.80 in 2006-2007 and 2008 respectively, all when fundamentals were not as good as they are presently.
********************************************************************************
If you’re nervous about the market but want to play PepsiCo with reduced risk, here’s a nice option combination:
……………………………..........................…………. Cash Outlay…................…….Cash Inflow
Buy 1000 PEP @ $51.98 ………................…..… $51,980
Sell 10 Jan. 2010 $60 Calls @ $3.10 ……….................................……………….. $3,100
Sell 10 Jan. 2010 $50 Puts @ $6.30 …...............................……………………... $6,300
Net Cash Out-of-Pocket ………….............................………….…. $42,580
On expiration date (Jan. 15, 2010):
If PEP shares are $60 or higher (+ 15.42% or better from today’s price):
Your shares will be called [sold] for $60,000.
Your $50 puts will expire worthless (a good thing for you as a seller).
You will have no further option obligations.
You will have $60,000 plus $1600 in dividends (at last year’s rate).
You will have $61,600 for your original net cash outlay of $42,580.
That’s a cash-on-cash total return of 44.6% in less than 12.5 months.
On shares which only had to rise by 15.5% (from a very depressed level).
If PEP shares are unchanged from today’s price:
Your $60 calls will expire worthless.
Your $50 puts will expire worthless (a good thing for you as a seller).
You will have no further option obligations.
You will own 1000 shares worth $51,980.
You will have collected $1600 in dividends (at last year’s rate).
You will have $53,580 for your original net cash outlay of $42,580.
That’s a cash-on-cash total return of 25.8% in less than 12.5 months.
On shares which did not go up.
What’s the risk?
If PepsiCo shares are under $50 on expiration date you will be forced to buy an additional 1000 shares and put up $50,000 more cash.
Your break-even on the original shares would be their cost of $51.98 less the $3.10/share call premium = $48.88/share.
Your break-even on the puts is the $50 strike price less the $6.30/share put premium = $43.70.
Thus the net break-even price on the whole trade would be the average of those two prices or $46.29/share.
Nobody can assure you that PepsiCo shares will not be lower than $46.30 by expiration date. I can tell you that they haven’t traded that low since early in 2004 when EPS, dividends, book value etc. were all substantially below today’s values.
Your worst case scenario would be to own high quality, low risk and good yielding shares near their 5-year absolute low price.
Disclosure: Author owns shares and is short options on PepsiCo.
