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HomeFinancePepsiCo did not lose its fizz; buy on the dip

PepsiCo did not lose its fizz; buy on the dip

Key points

  • PepsiCo had a mixed quarter, but margin shined and cash flow was strong.
  • Guidance is mixed, but expect a wider margin and earnings that are in line with analyst forecasts.
  • Analysts put the stock at “hold” and should maintain the rating in the first quarter of 2024.
  • 5 stocks we like better than PepsiCo

PepsiCo Inc. NASDAQ:PEP It hasn’t lost its fizz, but the heady days of revenue growth outpacing consensus tied to inflation and pandemic snacking are over. However, it leaves in its wake an era of strong performance and increasing margin, as this Dividend King continues to deliver results for investors. Among the highlights of the fourth quarter report were improved cash flow and a dividend increase, the 52nd in the company’s history.

PepsiCo’s dividend increase is worth 7% to investors who own the stock. The increase puts the annualized payout at $5.42, or about 65% of forecast organic earnings, leaving it in good shape given the long-term outlook. Its $5.42 represents a return of more than 3% and is near record levels. This stock tends to trade with a yield close to 2.6% to 2.7%, which suggests there is value present and there is value present.

PepsiCo is a highly valued stock that trades at 21 times 2024 earnings guidance, but that’s relative to the broader market, which doesn’t have the same dividend quality. It’s also a relatively expensive stock for a consumer staple, but not the most, trading in the 25X to 30X range, and its dividend is also a factor. PepsiCo is undervalued relative to its history, trading 5 to 7 times below its historical norms, suggesting a 25% discount for patient investors.

PepsiCo has a mixed quarter; the market falters

PepsiCo had a mixed quarter relative to consensus analyst estimates, but strengths in results offset weaknesses in revenue. The company reports $27.85 billion in revenue, down 0.5% year over year (YoY) and missing consensus by 180 basis points. The weakness is mainly due to volume, with a 3% drop in the food segments and a 2% drop in beverages.

Segmentally, all segments produced growth (or close enough), but Quaker Foods segments experienced significant weakness. Its revenue fell 10% and it experienced a significant margin contraction. Frito-Lay’s growth in North America was tepid, at 3%, but positive, and was compounded by a 3% increase in PepsiCo North America, an 8% increase in Latin America, a 10% increase in Europe and a 11% increase in Africa and the Middle East.

Margin news is good despite deleveraging at Quaker. Margin improved in almost all segments due to reduced charges and expense controls, causing gross profit, operating profit and net income to increase compared to last year. GAAP earnings more than doubled, while adjusted earnings grew by 650 basis points and outperformed by 340.

Forecasts are equally mixed: revenue targets have been lowered but a wider margin is expected. The company lowered its F2024 revenue target to 4% organic from 4.6%, but expects earnings of $8.15, which is in line with consensus. Additionally, the guidance includes another $1 billion in share buybacks, helping to boost value. Buybacks are offset by stock-based compensation, but it is enough to reduce the share count year-over-year. $1 billion is worth about 0.4% of pre-launch market cap; The buybacks reduced the share count by 0.3% in 2023.

Analysts sit back and enjoy Pepsi

Analysts have pegged PepsiCo at “hold,” which is unlikely to change after the fourth-quarter release. The first review to appear is from Wedbush, which maintained its Outperform rating and $195 price target. That target is $10 above the $185 consensus, suggesting a 7% upside is possible.

Price action is mixed in pre-open trading, with the market moving up and down before the open. The move suggests uncertainty and possible rotation within the market, but does not point to aggressive selling yet. The market may turn lower soon, but it is above critical support at a previous low and an uptrend line, so a deeper decline cannot be expected. A strong buy signal should develop if the market moves towards the trend line near $155.

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