Pepsico, Inc.
Fundamental analysis of Pepsico, July 10, 2017
Update, September 12, 2017
Pepsico is valued at 26.5 times 2016 earnings which is expensive. If we assume that the company will be making $4.50 this year, which is in line with what they’ve been earning so far in 2017, the P/E ratio comes in at 25.7 which is still very expensive. The P/E over the past three years’ earnings is 28.2.
The Free cash flow yield comes in at 4.4 per cent which qualifies the stock in the “watch” category.
The only reason why you would want to own such a stock is the dividend of $3.06 per share (2.6 per cent yield). In an environment where you are getting 2.17% on a 10-year note this may be interesting for some people. However, as it stands the stock is too expensive for me.
Update:
The day after publishing this we figured out that the company presented their earnings.
The earnings came in better than anticipated and we can now make estimated guesses for next year’s earnings.
We think they will come in around $4.50 per share which equates to a forward P/E of 25.3.
That is still far too expensive for my taste.
Yesterday interestingly the share went down 0.5 per cent to $113.74.
Valuation:
At $115 and a trailing P/E value of 26.5 the PepsiCo share is expensive. Over a period of three years, the P/E ratio is even higher at 28.2. Because of their high degree of intangible assets the Book value is negative so a measure like Price to book does not make sense.
Balance sheet:
PepsiCo has a Working capital of $6 billion but the Working capital to debt is low at only 0.1. The Debt to equity ratio is extraordinarily high at 5.6.
In all, PepsiCo’s balance sheet could look better.
Free cash flow and dividend:
The company has a Free cash flow of $7.4 billion which equates to $5 per share. Of this they both buy back outstanding shares and pay a good dividend of $2.96 (2.6 per cent). The earnings look stable.
PepsiCo has been paying out uninterrupted and increasing dividends for more than 25 consecutive years.
Conclusion:
At 26.5 times trailing earnings PepsiCo is too expensive for my taste. At these prices I would call it a SELL.