Why Im Investing in Pepsi Stock

Overview

PepsiCo, Inc. (NASDAQ: PEP) is a global food and beverage company headquartered in Purchase, New York. It operates in nearly 200 countries and owns a diverse portfolio of iconic brands, including Pepsi, Lay’s, Gatorade, Tropicana, Quaker, and Frito-Lay. The company competes primarily with The Coca-Cola Company (KO) and other major food and beverage companies.

Over the last 4 years, this stock has normally traded at an average forward PE of 19-21 and right now it is at a 17.

Out of the last 6 quarters, their net income has increased 5/6.

Pepsi's dividend is now up to 3.5% and that is with a 78% payout ratio. They have also been very consistent with increasing that dividend.

One of the only problems this company faces right now is their balance sheet since their debt is almost 5x more than their cash position. Luckily, interest rates have come down in the last few months and could very easily come down more in 2025, making it easier for their net income to go up.

Their profit margin has remained at around 10% for the last decade so I wouldn't expect it to be too much different in the years to come.

Their return on capital employed is usually around 17% which is good.

For 2023, the company reported EPS of $7.62, for 2024 analysts expect them to do $8.1, and for 2025 they are expected to do $8.5. Therefore although this is not a high growth company, their increase in earnings is fairly consistent.

The two big pieces of news for this company that have come out over the last few months is 1) They are being replaced by Coke products in Costco. Thats the bad news. However, #2 is that Subway is replacing coke products for Pepsi. This is huge for Pepsi because Subway is one of the largest chains in the world.

While the new Trump administration that features RFK Jr., has already started banning unhealthy ingredients, I don't think it will be the end of the world for Pepsi. Not only do companies like Pepsi diversify their products with healthier options, but sugary drinks is one of those things that too many Americans are addicted to just like nicotine and alcohol, therefore I don't think it should cause too much of a problem. Another thing that could pose a threat though is if Pepsi has to find alternative ingredients causing their margins to go down or if things like a sugar tax is introduced.

As you might imagine, I'm not investing in Pepsi because I think I'm going to get astronomical returns. What I've come to realize over the last few years of investing is that you must always try to weigh out the risk to reward for every investment and you should compare it to the index. The index is a fairly low risk investment that averages 10%/year in returns and over the last decade has had several years with returns over 20%.

Therefore, when I look at Pepsi, I look at it as a low risk investment where there is extremely low downside potential from its current stock price of $149. They own a strong resilient lineup of brands in both snacks and drinks, and the PE is low right now. I think there's a good chance that we have already seen the bottom for this stock during the last few weeks and I would be shocked if this stock fell to $130/share or less.

As for the upside, the most reasonable expectation is for it to return to its average forward PE ratio of 20 and so its 2025 expected EPS of $8.50 times 20 would equate to a $170 share price. This would be a 15% return roughly from where it trades now and then add the 3.5% dividend over the next 12 months and you have about an 18-19% return for 2025. I think theres also a great chance the stock reaches that price in 9 months or less.

Therefore, compared to invesing in the index, I think for the next 6-9 months, Pepsi looks like a better investment than SPY or QQQ right now.