Our latest focus stock is PepsiCo (PEP), which carries our highest recommendation of 5-STARS, or Strong Buy, notes equity analyst Garrett Nelson in CFRA Research's flagship newsletter, The Outlook.
Pepsi is a global leader in the snack and beverage industry. We view PEP as a high-quality, large-cap value/income name, which has been proactively investing in faster-growing healthier beverage and snack products to offset declining carbonated soft drink consumption.
We like the stock for several reasons at current levels. We particularly like PEP's Frito- Lay North America segment (25% of revenues and 51% of operating profit in 2019), which we think will benefit from stay-at-home trends and post strong sales growth, helping offset Covid-19 related softness in soft drink volumes stemming from reduced restaurant sales.
In late 2018, PEP named a new chairman and CEO who we think is positioning the company for more ambitious growth. Ramon Laguarta took over from Indra Nooyi, who had served as CEO over the past 12 years. Laguarta has been with the company for 22 years, and previously served as CEO of the company's Europe and Sub- Saharan Africa region.
From the outset, Laguarta pledged to make the company, "Faster, stronger, and better," and we think its acquisition of Rockstar Energy for $3.85B (announced in March) reflects a pivot toward higher growth categories.
PEP recently announced a dividend increase to $4.09 from $3.82/share annualized effective with the June dividend payment, which we think reflects confidence in its near- and intermediate-term prospects. The dividend hike represented PEP's 48th consecutive annual dividend increase; we note the company is a member of the S&P Dividend Aristocrats Index.
Our 12-month target price of $150 implies a FY 21 P/E multiple of 24.4x, higher than the average of packaged food and beverage peers. We think PEP's current multiples undervalue its ongoing diversification into higher-growth products and markets.
