Interactive Investor

Is PepsiCo’s stock ‘the real thing’?

13th October 2021 09:19

Rodney Hobson from interactive investor

Loading

Share on

In high demand during the good times and a comfort when things get tough, our overseas investing expert analyses this incredible global brand.

Rodney Hobson is an experienced financial writer and commentator who has held senior editorial positions on publications and websites in the UK and Asia, including Business News Editor on The Times and Editor of Shares magazine. He speaks at investment shows, including the London Investor Show, and on cruise ships. His investment books include Shares Made Simple, the best-selling beginner's guide to the stock market. He is qualified as a representative under the Financial Services Act.

Rising costs for energy, commodities and distribution are creating new headwinds for companies just as they are putting the impact of Covid-19 behind them. Investors would do well to look for companies with strong marketing positions that will withstand renewed pressure.

One possibility is PepsiCo (NASDAQ:PEP). Although it has been overshadowed by rival Coca-Cola (NYSE:KO), it is one of the largest food and beverage companies in the world. Apart from the Pepsi cola drink that gives the company its name, it sells Tropicana fruit juice, Quaker Oats and snacks such as Doritos.

A major attraction is that Pepsi mainly controls its own production, distribution and sales in more than 200 countries, but it does not pass up the opportunity to work with other manufacturers and distributors where this works to Pepsi’s advantage, nor does it eschew working with other famous names such as Starbucks (NASDAQ:SBUX) to mutual advantage.

Despite the worldwide spread, however, sales are still heavily concentrated in North America, which accounts for 60% of revenue. This is a double–edged sword. As long as the US continues its strong recovery from the pandemic, there is clear scope for Pepsi to make rapid progress, but any faltering in the home region would leave the group facing serious headwinds.

Pepsi beat expectations for revenue and profits in its third quarter to 4 September and, because its sales were hardly affected by lockdowns last year, comparisons are meaningful.

Net revenue rose 12% compared with the previous third quarter to top $20 billion (£14.6 billion), while pre-tax profits increased 7.5% from $3.05 billion last year to $2.83 billion. 

It is true that revenue growth slowed from the unsustainable 21% achieved in the second quarter, with all areas of the world faring less well. In particular, there is some concern that the key North American market slowed sharply from a 24% surge in sales to only 7%.

However, even the lower figures were impressive, and Pepsi was able to upgrade forecasts for organic growth for the full year from 6% to 8%. If the final quarter maintains the performance of the third, then that figure could push a little further ahead.

Source: interactive investor. Past performance is not a guide to future performance

A bigger worry at this stage is that supply chains in North America and elsewhere are volatile and the widespread shortage of delivery drivers plus energy restrictions are just two of several factors pushing up costs and squeezing margins. These pressures are highly likely to continue into the next financial year starting in December, with possibly limited opportunities to pass higher costs on to consumers who may well be struggling to make ends meet.

However, Pepsi has made a start by raising some prices during the summer and will carry on with this policy until it meets consumer resistance. So far, sales have held up in both developed and developing countries better than expected – and better than when Pepsi has increased prices in the past. This is despite the fact that many of the company’s products, apart from perhaps Quaker Oats, are eminently ditchable if consumers start to feel the pinch.

Perhaps cola and crisps become more attractive as comfort foods or perhaps, as the Pepsi board believes, consumers stick to the products they know and trust when times are tough.

The shares have had a tremendous if erratic run over the past five years, rising from $100 at the end of 2016 to a peak of $159 in August. Although they have eased back a little, they still trade around $157, where the yield is 2.7%, not bad for a company of this quality.

Hobson’s choice: The shares are probably at the right level while investors wait for the year-end update, but they merit at least a hold. Consider buying if they slip below $154. The downside is probably limited to $150.

Rodney Hobson is a freelance contributor and not a direct employee of interactive investor.

These articles are provided for information purposes only.  Occasionally, an opinion about whether to buy or sell a specific investment may be provided by third parties.  The content is not intended to be a personal recommendation to buy or sell any financial instrument or product, or to adopt any investment strategy as it is not provided based on an assessment of your investing knowledge and experience, your financial situation or your investment objectives. The value of your investments, and the income derived from them, may go down as well as up. You may not get back all the money that you invest. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.

Full performance can be found on the company or index summary page on the interactive investor website. Simply click on the company's or index name highlighted in the article.

Disclosure

We use a combination of fundamental and technical analysis in forming our view as to the valuation and prospects of an investment. Where relevant we have set out those particular matters we think are important in the above article, but further detail can be found here.

Please note that our article on this investment should not be considered to be a regular publication.

Details of all recommendations issued by ii during the previous 12-month period can be found here.

ii adheres to a strict code of conduct.  Contributors may hold shares or have other interests in companies included in these portfolios, which could create a conflict of interests. Contributors intending to write about any financial instruments in which they have an interest are required to disclose such interest to ii and in the article itself. ii will at all times consider whether such interest impairs the objectivity of the recommendation.

In addition, individuals involved in the production of investment articles are subject to a personal account dealing restriction, which prevents them from placing a transaction in the specified instrument(s) for a period before and for five working days after such publication. This is to avoid personal interests conflicting with the interests of the recipients of those investment articles.

Get more news and expert articles direct to your inbox

Sign up for a free research account to get the latest news and discussion, and create your own virtual portfolio.

Free Sign Up