PepsiCo, inc. (NASDAQ: PEP) is among the few companies that have successfully weathered both the COVID-19 crisis and economic recession. Demand for the snack and beverage giant’s popular products remained stable even when movement restrictions were in place, thanks to strong brand loyalty. The trend is likely to continue since it is widely expected that the addressable market for non-alcoholic beverages would grow at a steady pace in the coming years.
Unlike most Wall Street stocks, PEP maintained an uptrend in recent months though it experienced fluctuation. The stock reached an all-time high a few weeks ago, at a time when markets are hit hard by the stock selloff and macroeconomic issues. Currently trading close to its 52-week average, the stock is expected to gather further momentum, though at a relatively slow pace.
Valuation
The resilience is a testament to the company’s strong fundamentals and successful business model, but the valuation looks high after the recent gains. With a 2.8% yield, PEP is an attractive dividend stock for income investors. It goes without saying that PepsiCo is one of the safest investments and is capable of creating strong shareholder value, but the high price and market volatility make it less attractive from the short-term perspective.
Read management/analysts’ comments on quarterly reports
PepsiCo’s quarterly earnings either beat or matched estimated consistently over the past decade amid stable sales across all operating segments. In the June quarter, broad-based sales growth drove up total revenues to $20.2 billion. Consequently, adjusted profit moved up 8% annually to $1.86 per share. The company will be releasing third-quarter results on October 12 before the opening bell. The consensus estimate is for a 2.7% increase in adjusted earnings to $1.84 per share on revenues of $20.79 billion, which is up 3% year-over-year.
Competition
Ironically, the long-time rivalry between PepsiCo and arch-rival The Coca-Cola Company (NYSE: KO) has created a win-win situation – the competition is quite healthy, with both parties maintaining high quality and stability in pricing. At the same time, changing consumption habits amid growing health consciousness and the gradual shift to non-sugar beverages would force the companies to keep innovating their product portfolios.
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“If you go to more developed markets around the world like Western Europe, the categories are pivoting very quickly to non-sugar. In the UK, for example, the non-sugar segment in beverages is already almost above 80% of the market. So clearly, in beverages, non-sugar is king. You see some of our innovations in the last couple of years with, for example, Gatorade Zero. That was — it’s a huge innovation. I think it’s $1.5 billion in only 3 years and expansive to the category and recruiting new consumers into the brand,” said PepsiCo’s CEO Ramon Laguarta at the Q2 earnings call.
PepsiCo Positive
The company generates strong cash flow that allows it to repurchase shares regularly and pay decent dividends. The management is currently betting on its transformation plan called PepsiCo Positive to drive sustainable long-term value and competitive advantage. It includes three pillars called Positive Agriculture, Positive Value Chain, and Positive Choices. The strategic transformation envisages a fundamental change in the company’s brands and how they win in the market.
For the stock, it has been a roller coaster ride so far this year, marked by sharp gains and steep falls at regular intervals. The shares traded lower most of Thursday’s regular session.
