Pepsico Has Over 5% Upside Left

PepsiCo stock (NASDAQ NDAQ : PEP) currently trades at $136 and has gained only a little over 1% so far this year. It traded around $144 pre-Covid in February 2020 and is almost 6% below that level now. Also, the stock has gained 30% since its March lows of $104, following the stimulus package announced by the Fed. Having said that, we believe that the stock still has an upside of over 5% from its current level driven by expectations of rising demand and easing of supply constraints following the gradual lifting of lockdowns and benefits from recent acquisitions. Our conclusion is based on our detailed comparison of PepsiCo’s stock performance during the current crisis with that during the 2008 recession in our dashboard analysis.

2020 Coronavirus Crisis

Timeline of 2020 Crisis So Far:

• 12/12/2019: Coronavirus cases first reported in China
• 1/31/2020: WHO declares a global health emergency.
• 2/19/2020: Signs of effective containment in China and hopes of monetary easing by major central banks helps S&P 500 reach a record high
• 3/23/2020: S&P 500 drops 34% from the peak level seen on Feb 19, as COVID-19 cases accelerate outside China. Doesn’t help that oil prices crash in mid-March amid Saudi-led price war
• Since 3/23/2020: S&P 500 recovers 51% from the lows seen on Mar 23, as the Fed’s multi-billion dollar stimulus package suppresses near-term survival anxiety and infuses liquidity into the system.

In contrast, here’s how PepsiCo PEP and the broader market performed during the 2007/2008 crisis.

Timeline of 2007-08 Crisis

• 10/1/2007: Approximate pre-crisis peak in S&P 500 index
• 9/1/2008 – 10/1/2008: Accelerated market decline corresponding to Lehman bankruptcy filing (9/15/08)
• 3/1/2009: Approximate bottoming out of S&P 500 index
• 1/1/2010: Initial recovery to levels before accelerated decline (around 9/1/2008)

PepsiCo and S&P 500 Performance During 2007-08 Crisis

We see PEP stock declined from levels of around $51 in September 2007 (pre-crisis peak) to levels of around $34 in March 2009 (as the markets bottomed out), implying PEP stock lost 33% from its approximate pre-crisis peak. It recovered post the 2008 crisis, to levels of about $44 in early 2010, rising by 30% between March 2009 and January 2010.

S&P 500 Index saw a decline of 51%, falling from levels of 1,540 in September 2007 to 757 in March 2009. It then rallied to levels of 1,124, rising by about 48% between March 2009 and January 2010.

PepsiCo Fundamentals

How Do PepsiCo’s Fundamentals Look Over Recent Years?

PepsiCo’s Revenues grew 6.5% from $63 billion in 2015 to $67 billion in 2019, primarily led by strong performance in Frito-Lay segment and acquisitions over the years. Along with strong growth in revenues, the company was able to expand its margins meaningfully due to its Productivity Program, with earnings rising from $3.71 per share in 2015 to $5.23 in 2019.

Survival Check

Does PepsiCo Have A Sufficient Cash Cushion To Meet Its Obligations Through The Coronavirus Crisis?

PepsiCo’s total debt decreased from $37 billion in 2015 to $32 billion in 2019, while its total cash decreased from around $16 billion to $6 billion over the same period. The company also generated an impressive $10 billion in cash from its operations, and it appears to be in a good position to weather the current crisis.

Conclusion

Phases of Covid-19 crisis:

• Early- to mid-March 2020: Fear of the coronavirus outbreak spreading rapidly translates into reality, with the number of cases accelerating globally
• Late-March 2020 onward: Social distancing measures + lockdowns
• April 2020: Fed stimulus suppresses near-term survival anxiety
• May-June 2020: Recovery of demand, with gradual lifting of lockdowns – no panic anymore despite a steady increase in the number of cases
• July-September 2020: Poor Q2 results, but continued improvement in demand and a decline in the number of new cases and progress with vaccine development buoy expectations

Over the coming weeks, we expect continued improvement in demand and subdued growth in the number of new Covid-19 cases in the U.S. to buoy market expectations. As investors focus their attention on expected 2021 results, we believe PepsiCo stock has the potential for modest gains of about 5% in the near term as demand and supply get back on track with lockdowns being lifted.

For further insight into the food and beverage industry, you can see a comparative analysis of PepsiCo vs. Coca-Cola and why we feel Keurig Dr Pepper is better placed compared to Coca-Cola.

What if you’re looking for a more balanced portfolio instead? Here’s a high quality portfolio to beat the market, with over 100% return since 2016, versus 55% for the S&P 500. Comprised of companies with strong revenue growth, healthy profits, lots of cash, and low risk, it has outperformed the broader market year after year, consistently.  

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