Overview:
Overall, after our research and studying the fortune 500 company PepsiCo. we have concluded that there will not be any staggering fluctuations in the business. We issue a HOLD recommendation on PepsiCo. In our opinion the ideal position in this should be to hold as, the growth is negligible right now, the future is unpredictable seeing the current situation, it is better to hold the current value. (PEP) with a target price of $156.00, with a current stock price of $134.66 and a low of $130.00. Pepsico. has had a steady foothold in the industry for years and this remains today. We do not see this changing and in light of the economy today, we do not see anything but steadiness from Pepsi. Key points in factoring the result of the continued steady success of PepsiCo are it is a mature company with brand recognition and a quality business model to manage income and expenses, steady sales and operating income over the years, and a full line of branded products that offer competitive pricing while cutting costs.
Investment Summary:
PepsiCo’s portfolio contains 23 product brands and sells in more than 200 countries. Doritos, Mountain Dew, Tropicana, Lays, and Gatorade are only a few of PepsiCo’s popular Trademarks. Pepsico continues to be a growing company despite the current economic state. Shelf stable foods and beverages are in high demand due to COVID-19 as people stock up on groceries to self isolate, putting high pressure on the supply chain and manufacturing. Furthermore, their recent purchase of Rockstar gives them a wider range of beverages and a direct connection into the energy drink market. One of the biggest key driving factors of steady success for Pepsi is their brand. Their brand recognition is second to none and they have a very loyal consumer base. When it comes to brand quality resulting in sales Pepsi is at the top of the list. PepsiCo has a large operating income year by year and we expect this to remain the same. Another huge factor is their borrowing rate as of recent years has been relatively low which is a good indication of satisfying cash flow. This is a result of their large portfolio of products that can compete at a relative price point. The new acquisition of Rockstar and the increased popularity of energy drinks overall should result in an optimistic outcome for the company and we expect should pay dividends in the near future.
Financial Analysis:
With our five year forecast we expect revenues to steadily increase slowly. Revenue from 2014 through 2019 has always stayed above $62 billion but we predict revenues reaching $70 billion and above. Total Assets numbers have only increased over the past 3 years and short and long term debt has decreased. This is a wonderful indication of the current state of PepsiCo. Pepsi is also facing pressure from their significant competitor of Coca Cola brand but this is nothing unusual for PepsiCo. Increases in sales/gross profit/and net income are slightly up but for such a mature company as PepsiCo this is at no surprise. PepsiCo is slightly better than industry average when it comes to debt-to-equity ratio meaning that cash still drives the business and they rely heavily on sales which have been steady.
Valuation:
We used three different valuation methods in which to support our position, P/E, P/S and EV/EBITIDA multiples. Using the average value for each method allowed us to calculate a good estimate for Pepsi in relation to comparable firms. The marginally small increase within the past year for PepsiCo signals small but constant growth. PepsiCo can grow and expand as it acquires more brands and products and keeps up with customer demand. Incorporating each of the models allowed us to get a general sense of where the company is at currently and where it may be headed. Just as most mature long standing companies fluctuations to these models at times do not differentiate much. That is why it is best to get an average which can compare to the overall industry it presides in. The P/E multiple method was determined to be the best model that represents our forecast assuming that the market is pricing the stocks of other firms efficiently. P/E multiple method should provide a reasonable valuation while other methods are dependent on a larger set of assumptions which we tried to avoid. The Prices with methods used are looking static, and are not showing much growth, in situations like this we cannot predict profit for the future more accurately. We are assuming the profit will prevail in future as well with very negligible growth rate as we can see from Common Size Statements the growth in earning is either negative or negligible , if we take average of last years it also come to negative hence based on this, we can say it is better to hold it.
Investment Risks:
The carbonated beverage industry has in fact however taken a few hits in recent years due to the increased awareness of health implications. This is a factor to be cautious of when financing any beverage company of this nature. Society has a tendency to go with trends and when a company offers a product that is detrimental to health it always has risk of being unpopular. However, PepsiCo. has such a large consumer base and ones who are loyal to the brand to allow them to be successful today and for years to come. In a highly competitive industry, sales are mostly dependent on the purchasing power of consumers when the economy is impacted by an epidemic. Consumers will likely shift toward a firm that offers their needs at the cheapest prices. Failure to respond to changes in the economy exposes PepsiCo to risks like, losing its loyal customers and declining sales. This is particularly important to keep close watch on during these current times in our economy. Increased regulatory scrutiny and or legislation is another risk facing PepsiCo. A proposed soda tax aimed at curbing obesity could put increased pressure on the company. There are certain drinks that could be eligible for this additional tax depending on their sugar content. And mostly all PepsiCo beverages fall under this category.