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PepsiCo – Ready for a ‘Pop’?

January 28, 2010 | About:
manufactures and markets salty snacks as well as carbonated and noncarbonated beverages and foods. The firm's organizational structure constitutes three primary business units: PepsiCo Americas Foods, PepsiCo Americas Beverages, and PepsiCo International. The company's broad portfolio of brands includes Pepsi, Gatorade, Tropicana, Frito- Lay, Doritos, and Quaker.


PepsiCo has pulled back from a recent high of $64.48 and an all-time peak of $79.80 (in 2008) to this afternoon’s quote of $59.55 /share. Was there any bad news to account for this? Not really. EPS dipped slightly from a record $3.34 in 2007 to $3.21 in 2008 before rebounding last year. 2009 is expected to have come in at about $3.72 once Q4 results are posted in early February.


Zacks now sees $4.17 /share for 2010 putting PEP’s multiple at about 16x last year’s and 14.3x this year’s estimates. To get a feel for how cheap that is for PEP take a look at the per share data from continuing operations as reported by Value Line:




Year


Sales


C/F


EPS


Div.


B/V


Avg. P/E


2000


14.13


2.27


1.48


0.56


5.01


27.7x


2001


13.79


2.32


1.66


0.58


4.91


27.8x


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


27.85


4.30


3.21


1.60


7.77


20.5x


2009*


27.65


4.85


3.72


1.75


10.25


14.7x


* 2009 data includes Q4 estimates





PepsiCo has shown remarkably steady growth in sales and earnings while also increasing its dividend more than three-fold since 2000.


Value Line assigns PEP their highest safety and financial strength rankings and notes their ‘stock price stability’ and ‘earnings predictability’ are both in the top 1 percent of all stocks in VL’s 1700 stock universe.


The 10-year average P/E has been 21.9x versus the current forward multiple of 14.3x. The current yield of 3.02% is better than almost any other time during the past two decades. It’s also higher than what’s now available on money market accounts and 1 – 3 year CDs.


It would seem that a rebound to at least 17x projected earnings will be likely sometime over the next 12 – 24 months. That (still below-normal) P/E would bring PEP back to over $70 based on 2010 projections.


Is that a reasonable target price? Standard and Poors now carries a ‘fair value’ of $69.50 and Morningstar lists a similar $68.00 fair value right now. Previous calendar year highs of $66, $79, and $79.80 during 2006-2007-2008 provide further validation for our goal’s attainability. All those peak prices came on fundamentals that were less favorable than today’s.


A move from this afternoon’s quote of $59.55 to $70 would bring a 17.5% gain on top of the 3% dividend yield. In our uncertain market environment a 20% total return on a low risk [Beta = 0.6] high-quality issue doesn’t look bad.





If you’re option savvy you might consider this play out to January of 2011:






Cash Outlay


Cash Inflow


Buy 1000 PEP @ $59.55


$59,560




Sell 10 Jan. 2011 $65 calls @ $2.15 /share




$2,150


Sell 10 Jan. 2011 $65 puts @ $9.20 /share




$9,200


Net Cash Out-of-Pocket


$48,210







If PepsiCo shares rise to at least $65 (+ 9.2%) by Jan. 21, 2011:


· The $65 calls will be exercised.


· You will sell your shares for $65,000.


· The $65 puts will expire worthless.


· You will have collected $1,800 in dividends.


· You will end up with no shares and $61,800 in cash.


· You will have no further option obligations.





This best-case scenario profit would be $66,800 - $48,210 = $13,590


$18,590/$48,210 = + 38.56% cash-on-cash in (not quite) 12 months on any move up of 9.2% or better in the underlying shares.


What’s the risk?


If PEP shares are< $65 on the January 21, 2011 expiration date:


· The $65 calls will expire worthless.


· The $65 puts will be exercised.


· You will be forced to buy an additional 1000 PEP shares.


· You will need to lay out another $65,000 in cash.


· You will have received $1,800 in dividends.


· You will end up with 2000 PEP plus $1,800 in cash.


· You will have no further option obligations.





What’s your break-even on the whole trade?


On the original 1000 shares it’s the $59.55 purchase price less the $2.15 /share call premium = $57.40 /share (excluding dividends).


On the ‘put’ shares it’s the $65 strike price less the $9.20 /share put premium = $55.80 /share (excluding yield).


Your overall break-even would be $56.60 without dividends and $55.70 /share including the $1,800 in dividends.


PEP shares could fall be up to 6.4% without causing a loss on this trade.





Summary:


PepsiCo looks like a solid bet for about 20% total returns over the next 12 months or so.


Buying PEP shares and writing (selling) January 2011 $65 calls and puts could translate any move up of at least 9.2% into a better than 38% cash-on-cash result while also providing a 6.4% margin of safety in case things don’t play out as expected.





Disclosure: Author is long PEP shares and short PEP options.

About the author:

Dr. Paul Price
http://www.RealMoneyPro.com
http://www.TalkMarkets.com

Visit Dr. Paul Price's Website


Rating: 3.9/5 (9 votes)

Comments

munger
Munger - 4 years ago
Not a bad safe bet im what might be the best play out there now - quality US large caps

I can't help but wait for more of a pull back in prices though
Dr. Paul Price
Dr. Paul Price premium member - 4 years ago
PepsiCo Profit Nearly Doubles, Helped by Snacks

By THE ASSOCIATED PRESS


Published: February 11, 2010




PepsiCo’s fourth-quarter profit almost doubled on strength in its snacks business and overseas beverage operations. The company said on Thursday that it would keep expanding internationally to offset the slumping domestic drinks market.





Skip to next paragraph



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Daniel Acker/Bloomberg News


PepsiCo plans more snacks and growth in developing markets.





PepsiCo said that it expected more savings from buying two of its bottlers, the Pepsi Bottling Group and PepsiAmericas, a deal it said would help get new products to market faster because it would control their distribution. The deal, valued at $7.8 billion, should close this month, the company said.



PepsiCo said it would introduce more snack products and speed growth in developing markets, which it expected to help increase revenue and profit. International sales are becoming increasingly important for beverage makers, who are facing a soft domestic market as people shift toward more healthful juices and teas or reduce purchases to save money.

Rival Coca-Cola also is expanding overseas, which is helping its profits. But Coca-Cola has an advantage because more than three-quarters of its sales are abroad. PepsiCo’s international sales are about half its revenue. That figure is up from 25 percent a decade ago and will keep growing, said Richard Goodman, the chief financial officer.

In China, PepsiCo is building 14 plants to keep up with rising demand. Indra Nooyi, the chief executive, said PepsiCo planned to invest heavily in its beverages in China through 2015, and now can do so because it has received government permission to build the plants.

PepsiCo earned $1.43 billion, or 90 cents a share, in line with the estimates of analysts polled by Thomson Reuters, and up from $726 million or 46 cents a share a year ago. The estimates normally remove one-time items.

Sales for the period that ended Dec. 26 climbed 4.5 percent, to $13.3 billion, from $12.74 billion. That exceeded Wall Street’s $13.26 billion forecast.

Pepsi’s North American beverage revenue dipped slightly, to $2.75 billion, and volume fell 5 percent. The company said it was encouraged by the performance of its SoBe Lifewater and Gatorade beverages, which gained market share in the quarter.

Frito-Lay North America snacks sales rose 6 percent, to $3.89 billion, although its volume was flat.

Snack sales have held up better as people buy more food at grocery stores and eat out less in the recession. Internationally, snack sales volume dropped in Europe, which has been suffering in the recession. But volume in other parts of the world, including Asia and the Middle East, grew 13 percent.

Beverages outside of Europe and North America rose 8 percent in the quarter.

PepsiCo said it expected 2010 earnings to rise 11 to 13 percent on a constant currency basis.

Analysts predicted a profit of $4.16 a share for the year.

The company’s annual profit improved to $5.95 billion, or $3.77 a share, up from $5.14 billion, or $3.21 a share, a year ago.

Revenue for the year was nearly flat at $43.2 billion.

Shares of PepsiCo, based in Purchase, N.Y., rose 81 cents, or 1.34 percent, to $61.19 on Thursday.

Dr. Paul Price
Dr. Paul Price premium member - 4 years ago


PepsiCo to Increase Annual Dividend by 7 Percent; Authorizes Share Repurchases up to $15 Billion





PURCHASE, N.Y., March 15 /PRNewswire-FirstCall/ -- PepsiCo announced today that its Board of Directors approved a plan to increase cash returns to shareholders by raising the company's annual dividend and its share repurchase authorization amount.

PepsiCo Chairman and CEO Indra Nooyi said: "From 2005 through 2009, we distributed over $26 billion to our shareholders through dividends and share repurchases. The Board's action reflects continued confidence in the growth of our business and our commitment to providing strong cash returns to our shareholders."

The Board of Directors of PepsiCo approved a 7 percent increase in the annual dividend on PepsiCo common stock, from the current annual rate of $1.80 to $1.92 per share, its 38th consecutive increase. The increase will take effect when the Board declares the next quarterly common stock dividend, which is currently expected to be paid on June 30, 2010 to shareholders of record on June 4, 2010.

The Board of Directors also authorized the repurchase of up to $15 billion of PepsiCo common stock through June 2013.

Dr. Paul Price
Dr. Paul Price premium member - 4 years ago
From Barrons… Pass the Chips. It’s Party Time at Pepsi

PEPSICO SHARES HAVE BEGUN TO BUBBLE up in response to bold moves the company has made in recent months to increase shareholder value. Pepsi (ticker: PEP) announced last week that it will raise its dividend 7%, to $1.92 a share, and buy back $15 billion of its shares in the next three years. These moves follow the beverage and snack-food company’s acquisition of its two largest bottlers, which could result in up to $800 million of cost savings, Bill Pecoriello, CEO of ConsumerEdge Research, estimates.

Pepsi executives meet today and tomorrow with Wall Street analysts. “What analysts will [hear] is a very strong story about our ability to grow,” says Richard Goodman, the company’s chief financial officer.

Pepsi shares have climbed 7%, to around 66.50, since Barron’s laid out the bullish case for the soft-drink company four months ago (”At Pepsi, the Glass is Half Full”, Nov. 30). The stock has kept pace with the strong run in the Standard & Poor’s 500, and has run rings around shares of archrival Coca-Cola (KO), down 4% in the same period.

With its rich product portfolio, including brands such as Pepsi, Tropicana, Gatorade, Quaker Oats and Lay’s, Pepsi expects to grow earnings 11% to 13% this year, and by low double digits in the two years thereafter. Ian Jamieson, a portfolio manager at BlackRock who was bullish last fall, still sees the stock hitting 85 as the market anticipates Pepsi’s ability to earn $5 a share in 2012.

– Jacqueline Doherty

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