Undervalued Pepsi Is a Compelling Opportunity
This wide-moat company offers a 3%-plus dividend yield, and we forecast 3% sales growth.
Sonia Vora: We think shares of Pepsi offer a compelling opportunity for long-term investors, given a more than 10% discount to our valuation combined with a 3%-plus dividend yield.
In our view, the firm's formidable portfolio of leading beverage and snack brands has helped it entrench itself in retailers' supply chains and secure valuable shelf space for its offerings. These retail relationships, combined with economies of scale in manufacturing and distribution, underpin our view of Pepsi's wide economic moat.
While soft performance in the North American beverage businesses has weighed on shares in recent quarters, we expect these challenges to subside over the longer term as the firm more effectively allocates resources to its core beverage brands, which include trademark Pepsi and Gatorade. Further, we note that Pepsi has been able to drive low-single digit increases in price and mix over the same time frame, indicating that its brand equity remains solid.
Performance in the higher margin snack business also remains healthy. Frito-Lay North America, which generated around a quarter of sales and more than 40% of operating profit in 2017, has averaged around 3% sales growth over the past five years, outpacing the flat-to-negative results seen across the domestic packaged food space as of late. We expect performance in this business to remain strong as consumers' desire for more convenient foods continues to fuel snacking growth.
Our longer term forecast for Pepsi incorporates 3% sales growth, with around two thirds of these gains driven by price and mix, and average operating margin in the high teens.
Sonia Vora does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.