PepsiCo Stock Might Be Expensive, but It’s Still Worth Owning

Trading at 33 times free cash flow, there’s no question PEP stock isn’t actually cheap

PepsiCo (NASDAQ:PEP) reports its fourth-quarter results on Feb. 13 before the markets open. And despite PepsiCo stock gaining more than 27% over the past year, shareholders can’t afford any bad news.

PepsiCo Stock Might Be Expensive, But It’s Still Worth Owning
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Currently, PEP stock is trading around the $144 level, which is 33 times its free cash flow for the trailing 12 months. Therefore, the company does not a lot of room for error next week.

However, I don’t think that will matter, and here’s why.

Earnings Expectations

Analysts expect earnings per share (EPS) for PepsiCo to be $1.44 in Q4 2019, and $5.51 for fiscal year 2019. That’s down five cents from Q4 2018 and 15 cents from fiscal 2018, respectively — and that’s bad news.

The good news, however, is that analysts expect it to earn $5.95 for FY2020 — 44 cents higher than this past year. But, it’s important to note that as we’ve moved closer to the upcoming earnings announcement, analysts have gotten more conservative in their outlook.

Three months ago, nine analysts had a buy or overweight rating on PepsiCo stock. Today, though, that figure has dropped down to seven. Worse still, the average target price is currently $140.12, about 2.7% lower than its current share price.

Nonetheless, I like to consider the glass half full. Pepsi is still going to earn close to $6 a share in 2020. Furthermore, in October, it beat expectations on both the top- and bottom-line, with CEO Ramon Laguarta stating that it would “meet or exceed our full-year organic growth target of 4%.”

That said, the company’s product lines appear to be stronger than ever.

Bubly Taking Market Share

Currently, PepsiCo boasts an impressive 22 billion-dollar brands. Suspiciously absent from this list, however, is Bubly sparkling water, which the company only launched in early 2018. Using Canadian singer Michael Bublé as its pitchman, the company’s humorous ads have generated serious buzz — quickly boosting its market share.

In January, Nielsen named 25 consumer packaged goods brands that it thought were innovating their way to growth. Bubly made the list, as did several other beverage brands, including Coca-Cola’s (NYSE:KO) Dunkin’ Donuts Bottled Ice Coffee.

The reality is that Bubly is taking market share from Lacroix. Bubly generated $300 million in annualized revenue not too long after its 2018 launch, and is expected to join Pepsi’s elite billion-dollar club soon.

Sure, it might only generate 2% of the annual revenue that its legacy Pepsi brand does, but having another growth vehicle in the house can’t hurt. To have 22 brands generating at least $1 billion in annual revenue provides the ultimate in diversification.

Therefore, I continue to expect Bubly to deliver the goods.

What About SodaStream?

It’s been a little more than a year since Pepsi completed its $3.2 billion acquisition of SodaStream. As far back as 2012, I thought SodaStream’s products could quench two thirsts: First, that people enjoy drinking carbonated water, and secondly, that they want to do so without killing the planet.

“With its customizable options, SodaStream empowers consumers to personalize their preferred beverage in an environmentally friendly way and provides PepsiCo with a significant presence in the at-home marketplace,” PepsiCo CEO Ramon Laguarta stated upon the acquisition’s closing.

This past Christmas, I bought my wife one as a gift. I can state unequivocally that it’s cut down on the number of cans going into the recycling. So in my view, it’s a fantastic product that everyone should own.

With that said, SodaStream plans to do its best to ensure that it happens in the American market.

“Ramon has senior executives at chains like Walmart or Target on his speed dial, and that’s the difference. We’ve already been added to Albertsons, the third largest US retailer,” SodaStream CEO Eyal Shohat said in a recent interview.

It’s going to take time, but down the road, SodaStream will become a more significant part of the PepsiCo conversation.

The Bottom Line on PepsiCo Stock

Overall, only 1.5% of U.S. households have SodaStream’s. The U.S. market only accounts for 15% of the company’s estimated annual revenue of $900 million in 2019. This means that if 10% of U.S. households buy a SodaStream in the next 3-5 years, its revenues will double — and that’s solely from the American market. That doesn’t take into consideration its global growth.

When PepsiCo reports earnings Feb. 13, you won’t hear much from Laguarta about SodaStream. And that’s a good thing.

PepsiCo stock might be expensive today, but in five years — having bought now — I doubt you’ll look back with regret.

So, at 33 times free cash flow, PEP stock is still a buy.

At the time of this writing Will Ashworth did not hold a position in any of the aforementioned securities.

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