PepsiCo NASDAQ:PEP Investment Amid 2023's Stock Market Rally

Amid the 2023 stock market rally, the underperformance of PepsiCo's (PEP) shares might present a favorable opportunity for investors to acquire the beverage and snack giant's stock at a comparatively low price. Even with strong sales and earnings trends in recent quarters and an uplifted outlook for 2023, the company's shares haven't seen significant growth since the year's start.

Several reasons stand out for considering PepsiCo as a solid investment. Firstly, PepsiCo shows resilience and growth in an environment where many consumer-focused businesses are grappling with weak sales. Although the food business has seen a decline in volumes by 3%, the beverage segment has been performing well. This balance resulted in a 14% increase in overall organic sales. Compared to a food-related company like McCormick that is growing at roughly 10%, it's evident that PepsiCo is gaining market share despite a challenging selling environment.

PepsiCo's CEO, Ramon Laguarta, expressed satisfaction with the company's performance and business momentum, signifying confidence in its growth strategy.

Secondly, PepsiCo's management has also enhanced its earnings outlook, predicting a 9% increase in profits this year, a slight bump up from their previous estimate of 8%. This adjustment indicates the company's pricing power and successful product launches in emerging sectors such as sparkling water and energy drinks.

However, there are some concerns around profit margins. Since 2021, PepsiCo's margins have shrunk to around 13% of sales. For investors seeking higher earnings potential, other companies like Coca-Cola might be a more attractive option. Coca-Cola consistently converts nearly 30% of its sales into operating profit.

Thirdly, despite the challenges, PepsiCo's stock looks enticing at its current prices. PepsiCo's shares are valued at less than 3 times annual revenue, making them more affordable compared to McCormick's and Coca-Cola's ratios of 4 and 6, respectively.

PepsiCo's dividend payment, yielding over 2.7%, provides an immediate income and adds to its appeal for growth-focused investors. Setting those steady dividend payments to reinvest could pave the way for an improving sales and earnings picture for the company.

Moreover, the recent performance of PepsiCo's shares indicates a somewhat mixed picture. On July 7, the company's stock fell by 1.52%, while the S&P 500 gained 0.35%. Over the past year, the S&P 500 has grown by 15.13%, while PepsiCo's shares have gained a lesser 7.66%.

Investor interest in PepsiCo is also indicated by increased share purchases. Davidson Trust Co., for example, increased its stake in PepsiCo by 12.3% in the first quarter, buying an additional 803 shares. The company's shares constituted approximately 1% of Davidson Trust Co.'s portfolio, making it their 29th largest position.

Several other institutional investors and hedge funds have also adjusted their holdings in the company, including Richwood Investment Advisors LLC, Proquility Private Wealth Partners LLC, Wealth Advisory Solutions LLC, 180 Wealth Advisors LLC, and Brave Asset Management Inc., owning a combined 75.46% of the company's stock.

On the analysts' front, several brokerages have issued reports on PEP. Barclays, Deutsche Bank Aktiengesellschaft, UBS Group, Morgan Stanley, and Royal Bank of Canada all revised their target price on shares of PepsiCo upwards. These revisions suggest a generally positive outlook on the stock.

The company's stock performance has seen some volatility. For instance, on one Friday, PepsiCo's shares fell by 1.89% to $183.08, ending a five-day winning streak. However, the company's shares are not too far off from their 52-week high of $196.88 achieved on May 15th.

Based on a 2 Stage Free Cash Flow to Equity analysis, the estimated fair value of PepsiCo is around US$171. With a share price of US$183, the company appears to be trading close to its estimated fair value. However, one analyst's price target for PEP is US$199, which is 16% above this estimate, suggesting potential for growth.

As we move forward, investors are keenly looking forward to PepsiCo's upcoming earnings release expected on July 13, 2023. Projections indicate EPS of $1.95, marking a 4.84% increase from the prior-year quarter. Concurrently, revenue is expected to reach $21.6 billion, a 6.81% increase from the prior-year quarter.

In the broader context of valuation, PepsiCo's Forward P/E ratio currently stands at 25.46, a slight premium compared to the industry's average Forward P/E of 23.24. The company's PEG ratio is 3.25, which takes into account the stock's expected earnings growth rate.
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