PepsiCo Stock: A Strong Buy After Recent Pullback and Resilient Growth Prospects

PepsiCo, Inc. (NASDAQ: PEP) is a global leader in the beverage and snack food industry, boasting a diverse portfolio that includes top brands like Gatorade, Lay’s, Quaker Oats, Cheetos, and Mountain Dew. Despite a recent downtrend in its stock price, PepsiCo’s status as a “Dividend King” and its historical resilience present a compelling buying opportunity. The stock’s pullback to key support levels, coupled with its strong earnings outlook and strategic positioning, make it an attractive investment.

The Chart

PepsiCo’s stock has dropped from around $182 in May to about $163 per share. The chart shows the stock trading near its 200-week simple moving average, a level that has provided strong support and led to rebounds in the past. This historical trend suggests a potential buying opportunity as the stock finds support and possibly rebounds again.

Earnings Estimates and Balance Sheet

Analysts project PepsiCo’s earnings per share (EPS) to reach $8.17 in 2024, with revenues of $94.54 billion. For 2025, EPS is estimated at $8.83 on revenues of $98.95 billion, and by 2026, EPS is expected to rise to $9.49 with revenues of $103.23 billion. This translates to a price-to-earnings (P/E) ratio of around 20 times for 2024 and approximately 17 times for 2026, presenting a more attractive valuation compared to Coca-Cola (KO), which trades at over 22 times earnings.

PepsiCo’s balance sheet shows $45.87 billion in debt and $8.35 billion in cash, supported by an investment-grade credit rating that keeps borrowing costs low.

The Dividend

PepsiCo pays a quarterly dividend of $1.36 per share, yielding about 3.3%. As a Dividend King, PepsiCo has increased its dividend for 51 consecutive years, with a 5-year dividend growth rate of 6.62%. Over the past decade, the dividend has more than doubled, underscoring the company’s commitment to returning value to shareholders.

Challenges and Potential Downside Risks

1. Consumer Strain: Economic pressures on lower-income consumers could lead to reduced spending on snacks and a shift to cheaper alternatives.
2. Product Recalls: Recalls, such as the recent one by Quaker Oats, can impact revenues, brand value, and profit margins.
3. Strong U.S. Dollar: A strong dollar negatively affects international profits. However, projections of lower interest rates by the Federal Reserve could weaken the dollar, potentially turning this headwind into a tailwind.
4. Weight Loss Drugs: The rising popularity of weight loss drugs could reduce demand for high-sugar and high-fat snacks. However, PepsiCo has time to adapt by expanding healthier product options and adjusting portion sizes.

Opportunities and Growth Drivers

1. Pricing Power: PepsiCo’s ability to raise prices without significantly impacting demand could enhance margins.
2. Weaker U.S. Dollar: A potential decline in the dollar’s value could boost international profits and investor interest in dividend stocks.
3. International Expansion: PepsiCo has significant opportunities to grow in emerging markets. Brands like Rockstar Energy Drinks, popular in the U.S., can be expanded globally, particularly in Europe and Latin America.
4. Dividend Appeal: Lower interest rates could increase the attractiveness of PepsiCo’s dividend yield, leading to capital gains as investor demand rises.

Summary

PepsiCo’s recent stock pullback offers an attractive buying opportunity for long-term investors. The company’s strong support at the 200-week simple moving average, combined with its solid earnings projections and historical dividend growth, make it a compelling investment. Potential tailwinds, such as a weaker U.S. dollar and continued international expansion, further bolster the case for investing in PepsiCo. Given these factors, averaging into the stock over time, especially near key support levels, appears to be a prudent strategy.