PepsiCo (PEP) stock climbed 0.7 % this morning. According to our metrics, the company seems overvalued at today's prices. In the below analysis, we will put PepsiCo's valuation in the context of its poor growth indicators and mixed market sentiment, which are also strong drivers for share price.
PepsiCo, Inc. manufactures, markets, distributes, and sells various beverages and convenient foods worldwide. The large-cap Consumer Staples company is based in Purchase, United States and has 315,000 full time employees.
PEP Has a Higher P/E Ratio Than the Sector Average
Compared to the Consumer Staples sector's average of 24.36, PepsiCo has a trailing twelve month price to earnings (P/E) ratio of 39.4 and an expected P/E ratio of 23.6. The P/E ratios are calculated by dividing the company's share price by its trailing 12 month of $4.76 or forward earnings per share of $7.94.
Earnings represent the net profits left over after subtracting costs of goods sold, taxes, and operating costs from the company's recorded sales revenue. One way of looking at the P/E ratio is that it represents how much investors are willing to pay for every dollar's worth of the company's earnings. Since PepsiCo's P/E ratio is higher than its sector average of 24.36, we can deduce that the market is overvaluing the company's earnings.
PepsiCo Is Overvalued in Terms of Expected Growth
PepsiCo's PEG ratio is 3.26. This metric represents the company's earnings per share divided by its expected growth ratio, and is a useful complement to the price to earnings analysis, because it factors in growth to the valuation. A PEG ratio around or below 1 implies that the market in fairly valuing the company in terms of its growth estimates. But when the PEG ratio is higher, as in PepsiCo's case, it tells us the company is overvalued.
PEP Has an Alarming P/B Ratio
The price to book (P/B) ratio of a company is a comparison of the company's market capitalization versus its net asset, or book value. A ratio lower than 1 tells you that the equity market is undervaluing the book value of the company's assets, and ratios higher than 1 tell you that the equity markets are overvaluing the company in terms of its assets.
Of course, a company is worth much more than its assets alone, so the focus on P/B ratio is mainly to enable investors to single out undervalued securities that offer a margin of safety. Since PepsiCo's P/B ratio of 15.15 is higher than its sector average of 4.29, such a margin of safety does not exist for the stock.
Investors Stand to Gain from PEP's Cash Flows
PepsiCo has strong cash flows. With a coefficient of variability of 11.9% and an average growth rate of 0.9%, the company is effectively turning its revenue into cash. We calculate PepsiCo's free cash flows by subtracting capital expenditures (long term investments in the business) from its total cash flows from operations. The table below shows us that capital expenditures are evolving at a 5.3% rate, versus 2.9% for operating expenses:
| Date Reported | Cash Flow from Operations ($ k) | Capital expenditures ($ k) | Free Cashflow ($ k) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-12-31 | 10,811,000 | -5,207,000 | 5,604,000 | -19.84 |
| 2021-12-31 | 11,616,000 | -4,625,000 | 6,991,000 | 9.7 |
| 2020-12-31 | 10,613,000 | -4,240,000 | 6,373,000 | 17.65 |
| 2019-12-31 | 9,649,000 | -4,232,000 | 5,417,000 | n/a |
PepsiCo's Is a Profitable Business
If you are looking to make PEP a long term investment, it's essential that you understand the viability of its business through a study of its margins. Gross margins tell you how much the company makes in profit when only the costs directly related to producing the goods or delivering the service are taken into account. Operating margins, on the other hand, factor in overhead costs so they tell you how effectively PepsiCo is run.
PepsiCo's Gross Margins
| Date Reported | Revenue ($ k) | Cost of Revenue ($ k) | Gross Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-12-31 | 86,392,000 | 40,576,000 | 53.03 | -0.6 |
| 2021-12-31 | 79,474,000 | 37,075,000 | 53.35 | -2.68 |
| 2020-12-31 | 70,372,000 | 31,797,000 | 54.82 | -0.56 |
| 2019-12-31 | 67,161,000 | 30,132,000 | 55.13 | n/a |
PepsiCo's Operating Margins
| Date Reported | Total Revenue ($ k) | Operating Expenses ($ k) | Operating Margins (%) | YoY Growth (%) |
|---|---|---|---|---|
| 2022-12-31 | 86,392,000 | 34,459,000 | 13.15 | -6.34 |
| 2021-12-31 | 79,474,000 | 31,237,000 | 14.04 | -1.96 |
| 2020-12-31 | 70,372,000 | 28,495,000 | 14.32 | -6.53 |
| 2019-12-31 | 67,161,000 | 26,738,000 | 15.32 | n/a |
PepsiCo's cost of revenue is growing at a rate of 7.7% in contrast to 6.5% for operating expenses. Sales revenues, on the other hand, have experienced a 6.5% growth rate. As a result, the average gross margins growth is -1.0 and the average operating margins growth rate is -3.7, with coefficients of variability of 1.9% and 6.3% respectively.
We See Mixed Market Signals Regarding PEP
PepsiCo has an average rating of buy and target prices ranging from $220.0 to $178.0. At its current price of $187.36, the company is trading -6.73% away from its target price of $200.88. 0.7% of the company's shares are linked to short positions, and 75.9% of the shares are owned by institutional investors.
| Date Reported | Holder | Percentage | Shares | Value |
|---|---|---|---|---|
| 2023-03-31 | Vanguard Group, Inc. (The) | 10% | 131,380,192 | $24,615,406,886 |
| 2023-03-31 | Blackrock Inc. | 8% | 109,590,536 | $20,532,894,597 |
| 2023-03-31 | State Street Corporation | 4% | 58,566,663 | $10,973,056,271 |
| 2023-03-31 | Bank of America Corporation | 2% | 26,937,043 | $5,046,927,270 |
| 2023-03-31 | Geode Capital Management, LLC | 2% | 26,126,523 | $4,895,068,155 |
| 2023-03-31 | Morgan Stanley | 2% | 26,060,142 | $4,882,631,004 |
| 2023-03-31 | Charles Schwab Investment Management, Inc. | 1% | 17,880,236 | $3,350,042,937 |
| 2023-03-31 | JP Morgan Chase & Company | 1% | 16,942,944 | $3,174,431,807 |
| 2023-03-31 | Northern Trust Corporation | 1% | 16,956,928 | $3,177,051,851 |
| 2023-03-31 | Royal Bank of Canada | 1% | 14,911,395 | $2,793,800,569 |
