It’s not very often that investors get to pick up a value deal from the stock market. Still, when these sorts of opportunities come around, everyone should get involved before the chance is erased. Consumer staple companies, particularly, are not known for volatility or discounts as markets know their value and stability throughout the business cycle. This is why the discount found today in shares of PepsiCo Inc. (NASDAQ: PEP) is all the more important.
This stock is synonymous with stable demand and is part of a low beta group of stocks, as its own beta is a low 0.54 today. The statistics brew the stability and low volatility of this stock, but the fundamentals do the rest for investors to consider further. Just like the Coca-Cola Co. (NYSE: KO) is able to perform and sustain its price through any business cycle, Pepsi should, in theory, do so as well. This is why investors might want to dig deeper into the recent price action.
Now that Pepsi stock sold off nearly 10% within a month, investors might want to consider sentiment gauges from the broader market and Wall Street analysts, as well as other commonly followed valuation metrics such as forward P/E ratios and earnings per share (EPS) growth projections. All of these characteristics build further upon the company’s attractive dividend yield today.
Pepsi Stock's Discount Signals a New Wave of Upside Potential
At today’s price, Pepsi stock has a few metrics to show for its attractive upside potential. Starting with analyst price targets, investors can look at the consensus of $185.3 a share, which calls for a net upside of 10.8% from where the stock trades today.
However, looking into outlier ratings is more helpful in these situations, so investors can consider the $200 a share price target recently placed on Pepsi stock by analysts at Jefferies Financial Group. To prove these outlier targets correct, the stock must rally by as much as 19.6% from where it trades today.
Now that the foundation is set for the next rally, here’s something else to keep in mind. At today’s payout of $5.42 per share, Pepsi management feels confident in the company’s ability to weather the business cycle and offer investors an annualized dividend yield of 3.2% today, beating inflation and getting near the ten-year treasury bond yield.
More than that, despite the recent sell-off in Pepsi stock, bears decided to step away from raiding the company. Investors can check this trend in Pepsi’s 3.9% decline in short interest over the past month alone, showing signs of bearish capitulation and short position covering ahead of Pepsi’s potential recovery.
Others also took on their bullish views on Pepsi stock recently, namely institutional investors from Clearbridge Investments, who boosted their holdings by 0.7%, bringing their net allocation to $231.9 million today. Then there is the Healthcare of Ontario Pension Plan Trust, which added 116.9% to its Pepsi holdings for a $101.8 million position.
Where the Upside for Pepsi Stock Could Be Realized
Of course, more than being a stable brand and company, a new growth source must be present to boost the financials and valuations forward. Pepsi has one growth source that some investors might need to look into today: an exclusive partnership with Celsius Holdings Inc. (NASDAQ: CELH), a fast-growing energy drink brand.
This agreement, and a subsequent stake in Celsius, gives Pepsi the growth exposure it needs to justify a recovery, and here’s the potential magnitude of the comeback that it could make in the coming months. Investors will need to compare today’s valuation multiples to the long-term average so that they may understand just how undervalued Pepsi stock is.
On a forward P/E basis, Pepsi’s 20.0x valuation is roughly 18.4% below the longer-term average valuation of 24.5x forward P/E. This is another source of double-digit upside investors can somewhat rely on today, but it doesn’t end there.
Measuring Pepsi on a price-to-book (P/B) ratio can also be helpful for investors to understand the inherent discount the company offers today. A valuation of 12.3x today is well below the staples sector’s average P/B multiple of 5.9x, a gap that Pepsi stock could look to close in the coming months.
The most important thing to remember about Pepsi’s sell-off is that it mostly came from a recall related to its Quaker Oats brand segment. A salmonella outbreak is the reason for the double-digit sell-off in Pepsi stock over the past quarter, though that’s not enough to keep the company at this double-digit percentage discount.
When and if the market realizes this fact is up for debate, the true value investor will realize that the clock is ticking before more and more participants realize that Pepsi stock might not trade at such a discount for the duration of this business cycle.
