Tuesday, May 17, 2011

Has PepsiCo Peaked?

PepsiCo (NYSE: PEP) recently hit a new 52-week high and currently sports a $112 billion market capitalization. And with CEO Indra Nooyi pushing Pepsi to develop healthier snacks and drinks that still taste great, is PepsiCo stock poised to pop or has it peaked?

On May 12, the stock of PepsiCo, the $60 billion (most recent 12 months' sales) drink and snack powerhouse headquartered on an old polo ground in Purchase, NY, hit $71.27, culminating the most recent two months, during which its shares spiked 16% after a fairly dull year of 4.7% price appreciation.

Investors may have been pleasantly surprised by its first quarter 2011 earnings. Although PepsiCo's net income fell 20% to $1.14 billion compared to the previous year, its adjusted Earnings Per Share of 74 beat analysts' estimates by a penny. And revenue rose 27% to $11.94 billion -- beating analysts' estimates by 2%.

Moreover, PepsiCo announced good news for the rest of 2011. It expects 7% or 8% EPS growth over 2010's $4.13, despite commodity cost inflation of between 7.8% and 8.9% on its $18 billion base of commodity-based input costs. The reason for the continued EPS optimism is that PepsiCo plans to boost prices during the peak soft drink selling season that begins after July 4.

Meanwhile, PepsiCo is investing in new products that it believes will encourage more people to buy more of its products to fulfill Nooyi's adage, Performance with Purpose. According to the New Yorker, PepsiCo is developing products that contain less salt and sugar while preserving the taste experience that makes consumers keep coming back for more. It is also developing so-called functional foods -- such as different versions of Gatorade for the periods before, during, and after you exercise.

Do such products mean that you should pop PepsiCo's stock in your portfolio? To help with that decision, we can look at its Price/Earnings to Growth (PEG) ratio -- a way to determine whether the value that the market assigns a stock is justified by the rate at which it expects the company's earnings to grow. I think a PEG of 1.0 is a fair price and anything below that is a bargain.

PepsiCo's PEG of 2.11 makes it pretty expensive. Its P/E is 19 and PepsiCo's earnings are expected to grow 9% in 2012 to $4.90. PepsiCo stock yields 2.91% but at its current price, unless it can accelerate its earnings growth with those new products Nooyi is pushing, Pepsi stock may well have peaked.


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