Pepsico (NASDAQ:PEP) is having what I would call a ho-hum year. While PEP stock isn’t stinking out the joint – it’s got a year date total return of -1.3% through June 9 – you would think it would be outperforming the U.S. markets on the whole with everyone staying home for the better part of two months.
And yet, the Morningstar US Market Index has a YTD total return of 0.06%, barely treading in positive territory, but beating PepsiCo nonetheless.
Two things caught my attention recently that suggest Pepsi’s stock is ready for liftoff. Let me explain.
Direct-to-Consumer is Good for PEP Stock
When investors discuss direct-to-consumer, they’re generally speaking about companies like Nike (NYSE:NKE) and Lululemon (NASDAQ:LULU). Rarely, if ever, does PepsiCo enter the equation.
That is until the novel coronavirus hit. Covid-19 gave the beverage and snacks company the perfect opportunity to ramp up some of the direct-to-consumer initiatives it’s invested in recent years.
In May, PepsiCo launched both PantryShop.com and Snacks.com, two online sites dedicated to getting its snacks and beverages into the hands of as many people as possible.
Snacks.com, as its name suggests, provides consumers with products from its various snack brands, including Lays, Ruffles, Cheetos, Tostitos, and more. The best part: New customers who spent $15 on their orders got free shipping.
Homer Simpson would definitely be down for that.
As for PantryShop.com, PepsiCo put together kits priced from $29.95 to $49.95 that included a variety of products curated for your pantry from Quaker Oats, Gatorade, SunChips, Tropicana, etc.
PepsiCo was able to get both sites up and to function within a month. The results have been tremendous, said Michael Lindsey, chief transformation and strategy officer for Frito-Lay North America.
“We’ve seen incredibly strong demand for our snacks during this time, and Snacks.com offers consumers another way to purchase the products they love, delivered right to their door,” he said.
Investors might think soda pop when they think of PepsiCo, but the snacks business is driving its growth.
Analyst Sees Great Potential for Snacks
On May 29, Cowen & Co. analyst Vivien Azer, reiterated her “outperform” rating on PEP stock. She also reiterated her target price of $156, calling it her overall Top Pick. Based on its current share price of $134, Azer’s pick provides investors with a potential upside of 16%.
Azer argues that Covid-19 has only increased the demand for PepsiCo’s snack products.
“The coronavirus has more people staying at home—and snacking to fill the time,” Barron’s reported June 1.
“Given that Pepsi is a category leader in this area, it has been a major beneficiary of this trend, with recent data showing that in the eight weeks ended May 16, the company’s salty snacks sales climbed 10.9%, compared with 9.2% growth for the category overall.”
As the Covid-19 outbreak heated up, many consumers had difficulty obtaining snacks in high demand such as potato chips.
The analyst said the margins PepsiCo gets from its direct-to-consumer business are higher than those in the grocery stores. As a result, it could deliver an extra boost sales and earnings when the company reports second-quarter results in July.
Overall, Frito Lay North America delivers 44% of PepsiCo’s EBITDA profit and 25% of its sales. Azer sees a 5% increase in the division’s sales in 2020, not to mention a healthy contribution to profits.
Bottom Line for PEP Stock
The bottom line: I recently named PepsiCo one of 20 stocks to buy if you’re still betting on America to thrive. A lot of that confidence in PepsiCo is driven by its snacks business.
Long term, I recommend investors take a bite out of PEP stock at current prices. And if you bought in March when it was trading close to $100, you got an excellent deal.
Will Ashworth has written about investments full-time since 2008. Publications where he’s appeared include InvestorPlace, The Motley Fool Canada, Investopedia, Kiplinger, and several others in both the U.S. and Canada. He particularly enjoys creating model portfolios that stand the test of time. He lives in Halifax, Nova Scotia. At the time of this writing he did not hold a position in any of the aforementioned securities.
