Pepsi Doesn’t Need A 50% Pop To Be A Buy
The bull case articles in Barron’s – it being a sober and well-reported publication – often suggest an upside of 20% or 30% on well-known stocks the weekly has decided are undervalued. Big increases but nothing wild. And the magazine has an enviable record in identifying long and short candidates.
This past week’s issue, however, appeared to go out on a limb more than usual in suggesting Pepsico (PEP) shares have 50% or more upside. That’s a lot for a $140 billion market cap stock, one that’s up 17% since a February low spot, and that trades at a not-cheap forward PE ratio of 20. Not to mention it’s in the slow-or-no-growth soda pop business, where it plays second banana to Coca-Cola (KO).
The potential boost for the stock, of course, would be a split-up of Pepsico, separating the beverage business from the Frito-Lay snack operation, which grows faster. Nelson Peltz, a big shareholder, is agitating for such a split. CEO Indra Nooyi resists. But feeling the pressure, she has an aggressive cost-cutting program underway.
Either way, Barron’s concludes, shareholders are benefitting. That seems true enough. Parsing the article, the cost cutting won’t get Pepsico to profit levels that would likely push the stock up 50%. And the mature brands in both snacks and beverages aren’t about to offer up accelerated sales growth. At best, Nooyi would seem able to deliver slightly more rapid sales growth, fatter margins after cost cutting and to share more of the wealth with holder through dividend increases and stock buybacks.
The 50% upside, without an overall expansion of market multiples, seems contingent on Peltz’s hoped-for breaking up of the company. There’s little doubt the market would react favorably. In the near term at least, spinoffs are highly popular with the investing community. But achieving the kind of gains Barron’s suggests are possible – pretty much what Peltz is estimating, or $144 a share – of combined value in a spinoff would require a big leap of faith by investors.
But the good news is Pepsico doesn’t have to jump 50% to be a good buy. A more modest advance in the stock, supported by continuing and sustainable cost cutting and perhaps some sales growth improvement, would be pretty nice in this market. If you’re thinking of Pepsico, keep your expectations modest and let any surprise be on the upside. As long as Peltz is around, as Barron's notes, the stock should have some additional downside protection.
Jeff Bailey, The Editor of YCharts, is a former reporter, editor and columnist at the Wall Street Journal and New York Times. He can be reached at firstname.lastname@example.org. Read the RIABiz profile of YCharts. You can also request a demonstration of YCharts Platinum.