Key points
- PepsiCo had a mixed quarter, but margin was brilliant and cash flow was solid.
- The guidance is mixed, but calls for wider margins and profits in line with analysts’ forecasts.
- Analysts set the stock at “hold” and are expected to support the rating in the first quarter of 2024.
- 5 stocks we like better than PepsiCo
PepsiCo Inc. NASDAQ:PEP it hasn’t lost its momentum, but the heady days of above-consensus revenue growth tied to pandemic snacks and inflation are over. However, it leaves behind an era of solid performance and widening margins as this Dividend King continues to deliver for investors. Highlights from the fourth-quarter report include improved cash flow and a dividend increase, the 52nd in the company’s history.
PepsiCo’s dividend increase is worth 7% to investors who hold the stock. The increase brings the annualized payout to $5.42, or about 65% of expected organic earnings, leaving it in good shape given its long-term outlook. That’s $5.42, a yield above 3% and near record levels. This stock tends to trade at a yield close to 2.6%-2.7%, suggesting that value is there, and that value is there.
PepsiCo is a highly valued stock, trading at 21 times 2024 earnings guidance, but that’s relative to the overall market, which doesn’t have the same quality of dividends. It’s also a relatively expensive stock for a basic consumer good, but not the best, as it trades 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 standards, suggesting a 25% discount for patient investors.
PepsiCo has a mixed quarter; the market falters
PepsiCo had a mixed quarter compared to analysts’ consensus estimates, but profit strengths offset revenue weaknesses. The company reports revenue of $27.85 billion, down 0.5% year-over-year (YoY) and missed consensus by 180 basis points. The weakness was mainly due to volumes, down 3% in the food segments and 2% in the beverage segments.
At the segment level, all segments delivered growth (or close enough), but Quaker Foods’ segments experienced significant weakness. Its revenue fell 10% and it saw a notable contraction in margins. Frito-Lay North America growth was tepid at 3% but positive and compounded by a 3% increase in PepsiCo North America, an 8% increase in Latin America, a 10% increase in Europe and an increase in ‘11% in Africa-Middle East.
Margin news is good despite Quaker’s deleveraging. Margin improved across nearly all segments thanks to expense reductions and spending controls, which left gross profit, operating profit and net profit up compared to last year. GAAP earnings more than doubled, while adjusted earnings grew 650 basis points and outperformed by 340.
Forecasts are equally mixed, with reduced revenue targets but a wider margin expected. The company lowered its F2024 revenue target to 4% organic from 4.6%, but expects earnings of $8.15, in line with consensus. Additionally, the guidance calls for another $1 billion in share repurchases, helping to drive value. Buybacks are offset by share-based compensation, but enough to reduce the share count on an annual basis. One billion dollars is worth about 0.4% of pre-release market capitalization; buybacks reduced the number of shares by 0.3% in 2023.
Analysts sit back and enjoy some Pepsi
Analysts have pegged PepsiCo at the “hold” level, which is unlikely to change after the fourth-quarter release. The first revision to appear is 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-market trading, with the market moving up and down before the open. The movement suggests uncertainty and possible rotation within the market, but does not yet indicate aggressive selling. The market may turn lower soon, but it is above critical support on a previous low and bullish trend line, so you cannot expect a deeper decline. A solid buy signal should develop if the market moves to the trend line near $155.
Before you consider PepsiCo, you’ll want to hear this.
MarketBeat tracks daily Wall Street’s highest-rated and best-performing research analysts and the stocks they recommend to their clients. MarketBeat identified the five stocks that top analysts are quietly whispering to their clients to buy now before the broader market takes hold… and PepsiCo wasn’t on the list.
While PepsiCo currently has a “Hold” rating among analysts, top analysts believe these five stocks are better buys.
View the five stocks here
Need to extend your 401K or Roth IRA plan? Use these time-tested investment strategies to increase the monthly retirement income generated by your stock portfolio.
Get this free report