In an Uncertain World, This Stock is a Beacon of Stability

Inflation fears and the threat of an economic slowdown have investors worried. 

In return, they’ve been dumping tech stocks like crazy in search of more stability. 

That’s why we started digging into consumer defensive stocks for ideas.

After some discussion, we felt that one of our long-time favorite, PepsiCo (PEP) deserved a comprehensive analysis.

While they didn’t garner as many non-alcoholic beverages searches as Coca-Cola (KO) amongst financial pros for the month, they continue to see huge amounts of money flow.

But does that mean they are worth investing in right now?

Year-to-date, the stock isn’t up all that much, at least compared to Coke.

Find out as we investigate PepsiCo (PEP).

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PepsiCo (PEP) Business 

PEP is a worldwide distributor of food and beverages. 

The company provides its products primarily under the Cheetos, Doritos, Fritos, Lay’s, Ruffles, Tostitos, Aunt Jemima, Cap’n crunch, Life, Pasta Roni, Quaker Chewy, Quaker, Rice-A-Roni, Aquafina, Diet Mountain Dew, Diet Pepsi, Gatorade, Mountain Dew, Pepsi, Propel, Sierra Mist, Tropicana, Emperador, Marias Gamesa, Rosquinhas Mabel, Sabritas, Saladitas, 7UP, Gatorade, H2oh!, Manzanita Sol, Mirinda, Pepsi, Pepsi Black, San Carlos, Toddy, Agusha, Chudo, and Domik v Derevne brands. 

Operations are broken down into seven segments: Frito-Lay N. America, Quaker Foods N. America, PepsiCo Beverages North America, Latin America, Africa, Middle East and South Asia, and Asia Pacific, Australia and New Zealand, and China region. 

Revenue is also broken out by beverage and convenient food within the regions.

Beverage revenue from company-owned bottles is approximately 35-40% of the firm’s consolidated net revenue for Q1 2022. 

And while PEP is a global brand, a good chunk of its business comes from the Pepsico Beverages North America segment. In Q1 2022, PBNA produced net revenue of $5.3B of the firm’s $16.2B. 

Financials

Pepsi continues to find pockets to grow, despite being in business for more than 120 years!

In Q1 2022, the company’s organic revenue increased by 13.7% as the firm continued to benefit from strong category growth. 

At the end of 2021, PEP  had a gross profit margin of 53%, significantly greater than the sector median of 53.24%. 

Cash from operations landed $11.616B in 2021, a nice increase over 2020 by nearly 10%, similar to 2020 compared to 2019.

The company’s current ratio of 0.56x which would normally be a concern. However, the company’s size and massive cash flow make up for any shortfalls.

PEP has a quick ratio of 0.83x. In other words, its highly liquid assets are .83X greater than its short-term liabilities. 

The company has given approximately $7.7B back to shareholders in the form of dividends and shares repurchases with a current annual dividend of $4.30 per share.  

Lastly, the capital structure for PEP is as follows: total debt of $40.05B and cash upwards of $6.9B. And a market cap of approximately $240B.

Valuation

PEP has a price to sales ratio of 2.96X, which is more or less in line with the S&P 500.

The price-to-earnings ratio for PEP is 27.38x, which is higher than the sector median of 20.48 and concerning for a company of this size with typically low revenue growth.

PEP return on equity in 2021 was 63%, which is much greater than Coca-Cola (KO) at 42%, and Kuerig Dr. Pepper (KDP) at 8.7%

However, its EBIT margin is not as high at 14.16% compared to Coca-Cola (KO) at 29.6%, and Kuerig Dr. Pepper (KDP) at 24.41%

Our Opinion – 5/10

When investors fear inflation, and the potential of an economic slowdown, their eyes turn to safety. There are fewer safer names than PEP, which has been around for +100 years. 

However, at P/E at nearly 30x, PEP is trading at a significant premium. 

We don’t believe it will move much either way, so if you’re looking for a safe place to park your money and collect a decent dividend, this might be your stock. 

But we believe there are still better places to invest.