Is Pepsi Stock Overvalued?

PepsiCo, Inc. (NASDAQ:PEP) is one of the most recognizable soda brands in the world, and it’s more than just sugar water.

The company’s subsidiaries include Frito-Lay, Quaker, and it has international divisions across Asia, Africa, Europe, and Latin America. 

Although it bounced back well from a Q1 2020 selloff, stiff competition from its rivals has left PepsiCo fighting for a consumer base, and prospective buyers are enquiring: is PepsiCo stock overvalued?

The company is still fighting head-to-head with rival Coca-Cola Co (NYSE:KO), and neither shows any sign of letting up. Meanwhile, consumer tastes are changing away from many of the so-called “junk” foods they sell. Balancing health and transparency with profits will be pivotal to each company’s success.

We’ll pop the top off Pepsi to see how shaken up it is from the last year’s economic woes and find out if its market cap is ready to explode or fizzle.

Why PepsiCo Stock Went Up

Besides brief dips in 2002, 2008, and 2018, PepsiCo was on an upward growth path for most of the past 20 years.

Everyone noticed when stores’ shelves, formerly well-stocked, were barren from consumer panic-buying. Soda companies have their own regional distribution to ensure their shelves and displays are always fully stocked so there was still a supply of carbonated beverages.

It’s this distribution that left many consumers with nothing else to buy except Pepsi and Coca-Cola owned products. When panic shopping emptied grocery stores in March, it took the help of the National Guard to get food from distribution centers into consumers’ hands.

The company also owns SodaStream, thanks to a $3.2 billion acquisition in 2018. That gave it leverage in the sparkling water and homebrew communities during widespread stay-at-home orders.

Pepsi quickly bounced back as investor confidence was as visible as its products on store shelves. Even by Christmas, manufacturing delays, meat shortages, and other supply chain problems plagued most brands.

Because of this, PEP share price remained relatively stable in an otherwise turbulent 2020 market. Has the stock come too far too fast? The financials reveal that might lie ahead.

PepsiCo P/E Ratio Is Elevated

PepsiCo had a market capitalization around $200 billion ending 2020. This gave it a P/E ratio around 28x with a dividend yield of 2.81 percent. It kept up its quarterly cash payments when other companies suspended theirs; even raising it to boost investor confidence in June.

PEP has a $4.09 dividend yield closing out 2020.

Share prices flattened to a 52-week low of $101.42 during the market crash before bouncing back to trade between $130 and $140 for much of the year. It struggles to pass $150 per share, which it couldn’t do pre-pandemic either.

The company reported 5.3 percent net revenue growth in its third quarter 2020 earnings report. That put its year-to-date earnings per share (EPS) at $4.05. Of course, it wasn’t all good news. The company showed shrinkage in its Latin American, African, and Asian markets.

Its international exposure could make 2021 a turbulent year. First-world countries with a lot of money can afford to prop their economies up. But other countries aren’t so lucky – this leaves PepsiCo needing to pivot to meet changing market demands around the globe.

Still, management did report growth in its Frito-Lay, Quaker, and PepsiCo Beverages divisions in North America. This gives investors enough confidence that the company can continue generating stable revenue and income growth over the next decade.

Is PepsiCo Valuation Too High?

While PepsiCo is doing overall well, it lost a lot on its business-to-business market. When restaurants were forced closed in the spring, it effectively shut down the syrup sales.

On top of this, gyms closing mean less Gatorade and coconut water flying off the shelves.

At its core, many of PepsiCo’s products are considered nonessential. It’s not exactly what you think of as a health food company. It does have some healthier snacks in its portfolio though, including Smartfood popcorn, Sabra hummus, Quaker oats, and Bare fruit chips.

Some analysts believe the company may even be undervalued when its price-to-sales (P/S) ratio is compared to rival Coca-Cola (KO). By this measure, PepsiCo is valued at only half of its rival’s. That could give it room to grow, but it also risks dropping in the 2021 economy.

Will PepsiCo Stock Drop?

PepsiCo bounced back quickly from a sharp drop in 2020, but it’s not immune to market conditions. In fact, it experienced two share price declines in September and October and struggles to reach $150 per share.

It underperformed the S&P 500 and could represent a value Buy to investors when it dips again. Pepsi is also pulling out all the stops to gain consumer attention in the coming years.

The company tasked its work-from-home design team to create a new bottle design to be rolled out next year. It was done using virtual reality (VR) and 3D printing and will be used for its Pepsi, Mountain Dew, Schweppes, and Crush brands.

And it went on an acquisition spree in 2020, buying Senselet Food Processing and Be & Cheery, along with Rockstar Energy.

It bought Pioneer Foods Group for $1.7 billion in March. It also inked an exclusive North American distribution deal with Bang Energy and another with Evian bottled water.

The market will ultimately decide whether this is a slick marketing move or putting lipstick on a pig.

Is PepsiCo Stock Overvalued? The Bottom Line

PepsiCo is a long-standing drink and food company that warred with Coca-Cola for market dominance from its start.

It has since expanded to buy a large portfolio of products, along with its own distribution system. This distribution proved more effective than grocer’s, leaving the soda aisle full in empty stores during the pandemic panic-shopping sprees.

The company also acquired several companies and partnerships to generate long-term revenue. This gives investors confidence that it can maintain its value. What’s not yet certain is whether the company can grow its bottom line and continue providing an aggressive dividend payout to be more attractive than its arch-rival.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.