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PepsiCo did not lose its fizz; buy on the dip

Pepsi can and plastic bottle on ice

PepsiCo Inc. (NASDAQ: PEP) did not lose its fizz, but the heady days of consensus-beating revenue growth tied to pandemic snacking and inflation are over. However, it leaves an era of solid performance and widening margin in its wake, as this Dividend King continues delivering for investors. Among the highlights of the Q4 report are improved cash flow and a dividend increase, the 52nd in company history.

PepsiCo's dividend increase is worth 7% to investors holding the stock. The increase puts the annualized payout at $5.42, or about 65% of the organic earnings forecast, leaving it in healthy shape given the long-term outlook. It's $5.42 is more than 3% yield and near record levels. This stock tends to trade with a yield near 2.6% to 2.7%, suggesting a value is present, and there is a value present. 

PepsiCo is a highly-valued stock trading at 21x the 2024 earnings guidance, but that is relative to the broad market, which does not have the same dividend quality. It is also a relatively expensive stock for a consumer staple but not the most, trading in the 25X to 30X range, and its dividend is also a factor. PepsiCo is undervalued relative to its history, trading 5x to 7x below its historical norms, suggesting a 25% discount in place for patient investors.

PepsiCo has a mixed quarter; the market falters

PepsiCo had a mixed quarter relative to the analysts' consensus estimates, but bottom-line strengths offset weaknesses in revenue. The company reports $27.85 billion in revenue, down 0.5% year-over-year (YoY) and missed consensus by 180 basis points. The weakness is primarily due to volume, down 3% in food and 2% in beverage segments. 

Segmentally, all segments produced growth (or close enough), but the Quaker Foods segments encountered significant weakness. Its revenue fell 10%, and it experienced a considerable margin contraction. Frito-Lay North America growth was tepid at 3% but positive and compounded by a 3% gain in PepsiCo North America, an 8% gain in Latin America, a 10% increase in Europe and an 11% increase in Africa-Mid East. 

The margin news is good despite the deleveraging in Quaker. The margin improved in nearly all segments due to reduced charges and spending controls, which left the gross profit, operating profit and net income up compared to last year. The GAAP earnings more than doubled while adjusted grew by 650 basis points and outperformed by 340. 

The guidance is equally mixed, with revenue targets lowered but a wider margin expected. The company lowered its F2024 revenue target to 4% organic from 4.6% but expects earnings of $8.15, which aligns with the consensus. Additionally, the guidance includes another $1 billion in share repurchases, helping drive value. The repurchases are offset by share-based compensation but sufficient to reduce the share count on a YOY basis. A billion dollars is worth about 0.4% of the pre-release market cap; repurchases reduced the share count by 0.3% in 2023. 

Analysts sit back and enjoy some Pepsi

The analysts have PepsiCo pegged at "hold," which is unlikely to change after the Q4 release. The first revision to pop up is from Wedbush, which maintained its Outperform rating and $195 price target. That target is $10 above the $185 consensus, suggesting a 7% upside is possible. 

The price action is mixed in pre-market trading, with the market moving up and down ahead of the open. The movement suggests uncertainty and possible rotation within the market but doesn't point to aggressive selling yet. The market may move lower soon but is above critical support at a previous low and uptrend line, so you can't expect a deeper fall. A solid buy signal should develop if the market moves to the trend line near $155. 

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Photography by Christophe Tomatis
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