The Razor's Edge
2-Year Price History
Recent Price
(12/3/2008)
$54.08
52-Week Price
$49.74 - $79.79
Market Capitalization
$84.0 Billion
Most Recent Dividend
$1.35
About PepsiCo, Inc.
PepsiCo, Incorporated is considered to operate in the Consumer Goods
sector. They specifically operate in the Processed/Packaged Goods
business segment contained within the Food & Beverage industry.
A global snack and beverage company. The Company manufactures, markets and sells a variety of salty, convenient, sweet and grain-based snacks, carbonated and non-carbonated beverages and foods.
Ockham's Rating
We are reiterating our Undervalued rating on PepsiCo, Incorporated (PEP) this week. PepsiCo, Incorporated was downgraded to this rating in the report dated 11/10/2008. While we are reaffirming our previous rating, it is still important to understand recent developments for PepsiCo, Incorporated, which may have an effect on the stock going forward.
For starters, the price of PEP rose from $54.59 as of 11/22/2008 to a price of $56.70 as of 11/29/2008. While this increase of 3.87% was not large enough for Ockham to downgrade the stock, it does however slightly lessen the attractiveness of PEP.
As of this report, there have been no meaningful adjustments in cash earnings expectations or guidance in the last week.
PEP Stock Evaluation
As noted in the Recommendation Summary, we are content with maintaining our Undervalued rating on PEP. Although there has been no additional earnings guidance offered by PEP's management in the last week, the stock price has increased by 3.87%, which is a negative from a value perspective. However, while the price increase does make the stock less attractive, it is only marginally less attractive and not enough to warrant a downgrade. Find more on this and other fundamental factors in our analysis in the paragraphs that follow.
PEP Revenue
As we have often noted, in our valuation methodology, "Cash is King." Well, it goes without saying that if a company cannot produce sales then there is no ability to generate cash flow. By that logic we look very closely at revenue numbers as our second most important factor in valuing a company's stock. We have established reasonable Price to Sales per share ranges based on historical data of the last 10 years. For, PEP the high and low end of the Price to Sales per share ratios are 3.14x and 2.38x respectively.
Notice that PEP's current Price to Sales per share ratio is 1.95x, which is quite a bit below what we consider a normal Price to Sales ratio for this stock. Given normal conditions and a price of $56.70, PEP is 30% below where we would expect to see it. This will beneficially factor into our final analysis of PEP as it is not often that this stock sinks to these levels.
PEP Cash Earnings
As a value investment framework, Ockham Research is similar to a private equity firm in terms of our valuation methods. We are always on the lookout for value in the form of sales and cash numbers. In the case of PEP, Ockham views their current Cash Earnings as significantly below their historical average multiples of Cash Earnings, as calculated by our proprietary analysis. It is incredibly important to understand that for PEP, the current level of Cash Earnings compared to its historical levels helps identify where PEP is in relation to what the investing community was willing to pay for this level of Cash Earnings in the past. With a historical high Cash Earnings per share ratio of 17.73 and a historical low Cash Earnings per share ratio of 13.40, an investor can relate where value becomes optimal.
So what does "significantly below" mean when we talk about Price to Cash Earnings numbers for PEP? From the Ockham perspective, we are looking specifically at PEP to see if the market is recognizing the huge disparity between PEP's past stock price to Cash Earnings ratio to today's levels. At a difference of 31% below the average historical Price to Cash Earnings ratio, our view would be quite positive at this point. However, as with all metrics, we need to also take other factors into account when looking at PEP. While we view better Cash Earnings metrics as very important, if the market is slow to identify this value, or if Cash Earnings were to fall from these levels, we would become more neutral in our stance.
PEP Dividends
A strong dividend payment history is looked upon as a favorable characteristic on a company’s future and potentially can receive a positive Ockham rating. That being said, we don't require dividend payments for company's whose management has elected to forgo them entirely.
When reviewing dividend yields for PEP, we compare the historic high and low levels over the past, which is similar to our evaluation of Sales and Cash Earnings per share. Paying a dividend is not necessary for any company, but changes in dividend often can lend clues as to the health of the business. A rising dividend is a strong sign for an established company, as it reflects management's confidence in the company. PEP’s estimated annual dividend is $1.70 resulting in a current dividend yield of 3.00%. The highest dividend yield from PEP over recent history was 3.42% while the lowest dividend yield was 1.10%. It's hard not to notice that PEP pays a current dividend yield that is 32.74% above the historical median. This peaks our interest since our analysis is looks favorably upon dividend yields that are greater than the historical median.
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