Three $100 stocks – Part 1 – PEP

The following three stocks are around the $100 mark for the past few weeks and I have been wanting to write about them for a while. I hold positions in all three stocks and hence have been following them quite closely. Each stock is in a different sector and different growth phase and also moving in different directions lately. The three stocks are PEP, JNJ and DIS. I initiated positions in these companies in the recent past (within the last 6 months) and have been adding to these positions as part of my weekly purchases as and when price made sense.

In part 1 of this post, I am going to look at PEP’s numbers more closely. This is just my quick and dirty process to look at the numbers like Revenue, Income and EPS history and growth and looking at the P/Es and is no means a through analysis of all the data points and charts and numbers.

Pepsi has been on a great run for the past year. The price was in high 70s in Feb 2014 and now it is approaching $100. The stock also crossed the $100 mark briefly a couple of times. The stock jumped from around $95 to the current levels when the latest quarterly results beat expectations. But is the stock fairly valued at this price?

  • The revenue increased from 57,838 Mil in 2010 to 66,683 Mil in 2014, but has largely remained constant from 2011 to 2014. There is not just enough growth in the top line.
  • The net income increased from 6,320 Mil in 2010 to 6,513 Mil in 2014.
  • The EPS increased from 3.97 in 2010 to 4.31 in 2014 primarily due to reducing in outstanding shares from 1,590 Mil in 2010 to 1,509 Mil in 2014. The EPS growth represents a CAGR of 2.07%. Going back to 2005, the EPS growth from 2005 to 2014 represents a CAGR of 6.57%.
  • The lack of EPS growth is reflected in the P/E currently being at 23.2 compared to PEP’s 5 year average P/E of 18.1.
  • Let’s assume the EPS growth to be a 5% for 2015. This is higher than the recent growth, but less than the average growth in 10 years. Even with this optimistic number, the EPS can be projected to be 4.53 for 2015. Applying the average P/E of 18.1 will result a price of $82.00. Applying the current P/E of 23.2 will result in a price of $105.09.
  • At the current price (~$99.00), the projected dividend yield is 2.65%.
  • The stock definitely looks expensive looking at these numbers. Of course in current market conditions, there is a premium for a stock like PEP due to its consistent dividends and dividend growth. So considering these facts, I am hoping that a price point between $90 and $95 would be a reasonable price. I was looking to add more PEP as I mentioned in my weekly purchases post, but looking closer at the numbers, I would like to wait and see if I can get a better price point for the stock.
  • Morningstar currently has a 3 star rating on the stock with a fair value of $95.00.

What do you think about PEP’s current price and valuation?

12 thoughts on “Three $100 stocks – Part 1 – PEP

  1. PEP is a touch expensive here in my opinion. I like them down below $90 if possible, albeit unlikely. Another position I wished I’d been able to get more capital into the first half of last year. Oh well, I’m happy to have a tiny bit of exposure. Certainly better than nothing!

    • MDP, That’s correct. PEP raised so much so fast especially for a stock that is in the stable growth phase. Below 80 definitely sounds great, but I would take below 90 as well at this time.
      CLX too has increased quite a bit in the last year. I initiated my position around 88 in August of last year and it is already up over 20% in 6 months.
      Thanks for stopping by.

  2. 3 great stocks on the list, and PEP has been one of my best picks. Like the 2 readers above, I wish I would have bought a ton more back in 2011 when I first purchased them. Hindsight is 20/20 so just gotta stay on the lookout for the next stock that can make a run like PEP.

    Otherwise, I agree that PEP is a bit overvalued. I’d like to see an 18 PE again and the stock to fall in price to get there, but it does not appear that will happen.

    Thanks for the post, look forward to the next 2.

    • Thanks ADD. You are right. We need to be on the lookout for the next stock like PEP, but at the same time we have to keep investing consistently to be able to make progress for the short term as well long term goals.
      Thanks for your thoughts.

  3. I went with KO over PEP when I started out – I’ve not been inclined to add PEP since just because of the large market overlap with KO when there are so other quality dividend stocks in the consumer defensive sector. So I’ve not been following their financials closely.

    It’s certainly no bargain at today’s price but if you’re investing small amounts for dividend growth then likelihood and amount of dividend growth is probably a more valuable criteria. At least that’s what I tell myself when I buy a slightly overvalued stock that I like for the long-term!

    Interestingly PEP was at similar P/E levels compared to the S&P back in 2007 with a price of $60-$70. It took 5 years to regain that price…paying dividends the whole time.

    Looking forward to your look at the other stocks in your list!

    Best wishes,

    • Hi DL,
      You are right. Adding in small amounts for dividend income and growth will help overcome the fact that the stock is expensive. Like you, that’s I tell myself when I am purchasing an overpriced stock especially in small quantities. It is a small premium to pay for a dividend champion. I hold KO and PEP and have been adding KO the last few weeks. But the KO too has rebounded this week and don’t think I want to add to it anymore. Hopefully there are other great stocks at reasonable prices that would enable me not to buy PEP/KO at the current levels. Let’s see.
      Thanks for stopping by and sharing your thoughts.

  4. Agree with the above. Looks like almost all the stocks considered “good/excellent” dividend stocks are at a premium right now. I’m doing what you mentioned which is just sucking it up as I’m buying small amounts in bi-monthly purchases. I’ll add that i’ve been trying to buy stocks that are down from either when I initially bought or when I added it to my watch list as a way to lower overall price. I was able to average down on a few positions this way.

    • That’s true CG. Sometimes we just end up paying a premium because of the quality of the stock and that’s one of the reasons most of these stocks are trading at a premium. And I have been trying to do the same like you – buy stocks that are lower than my average price to average down.
      Thanks for your thoughts.

  5. PEP is a nice dividend for stability in a dividend growth portfolio or a nice adding into a conservative portfolio. However, it is currently overvalued in my point of view (I’d wait for a lower price, just like you). Not really related to the stock or the company, but compared to what the market can offer us in general.

Leave a Reply

Fill in your details below or click an icon to log in: Logo

You are commenting using your account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s