Valuable Brands Boost PepsiCo

10/23/2017 5:00 am EST

Focus: CONSUMER

John Staszak

Securities Analyst: Consumer Discretionary & Consumer Staples, Argus Research Corporation

PepsiCo (PEP) is a well-managed company with a valuable brand portfolio, and continues to generate solid growth despite weak consumer spending, says John Staszak, analyst with Argus Research.

We expect solid results from Frito-Lay North America, growth in health and wellness products, and price increases to translate to positive earnings surprises over the next two years.

Despite investments in advertising and marketing programs and foreign currency headwinds, PepsiCo reported strong 3rd quarter 2017 earnings, topping the consensus EPS estimate by $0.05.

We expect cost cutting to continue to benefit earnings. The company has implemented a $5 billion, five-year productivity improvement program.

PepsiCo is in its third year of a five-year, $5 billion productivity improvement program that will run from 2015-2019. We expect PepsiCo to achieve its goal of $1 billion in annual cost savings and productivity gains in 2017.

Initiatives include optimizing the company’s global manufacturing footprint and reengineering its distribution network. For 2017, management now projects 9% adjusted earnings growth in constant currency. It expects commodity costs to accelerate, with a tax rate of 24%.


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Improved productivity is expected to lower costs by $1 billion. Management plans to spend $2.0 billion on share repurchases and $4.5 billion on dividend payments in 2017. It still projects full-year capital expenditures of $3 billion, consistent with its long-term expectation for capex at 5% of revenue.

Looking ahead, we expect more moderate commodity prices and productivity improvements to benefit earnings. Reflecting a $0.05 beat in 3rd quarter 2017, we are raising our 2017 EPS estimate from $5.20 to $5.28. For 2018, we are increasing our estimate from $5.60 to $5.70.

Our long-term growth rate forecast remains 8%. In June 2017, the company raised its quarterly dividend by 7.0% to $3.22 annually, for a yield of 2.9%.

The shares are trading at a relatively high forward P/E multiple. However, we think investors will continue to favor the shares given the company’s ability to develop innovative new products and execute its growth initiatives.

Reflecting a recent dividend hike, increased share repurchases, and productivity gains, we calculate a fair value for PepsiCo of $128 per share. Our target price of $128, combined with the dividend, implies a total potential return of 19% from current levels.

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