Morningstar | Recovery in Pepsi's Share Price Reinforces Our View of Its Substantial Brand Equity
Shares of wide-moat Pepsi have increased by a high-teens percentage since falling toward $100 in June. This supports our contention the declines its North American beverage business (around a third of sales) had faced over the prior three quarters were due to a suboptimal allocation of marketing resources between its largest brands and newer offerings, rather than a deteriorating competitive positioning. As we expected, the firm's renewed focus on execution among its core brand set (which includes trademark Pepsi, Gatorade, and Mountain Dew) supported positive trends in its domestic beverage segment, including 2.5% organic growth in the third quarter. However, we think the firm will need to strike the right balance of spending between more niche fare and its billion-dollar brands to ensure that this recovery is sustainable.Pepsi has been able to maintain low-single-digit improvements in price/mix over this time frame (this metric ticked up to 2% in the third quarter, versus around 1% in the first half of the year), which we view as evidence that its underlying brand strength remains solid. We posit Pepsi will be able to drive modest improvements in price/mix longer term as it remains focused on innovation across its food and beverage portfolio (particularly as many of its new offerings have a premium bent), which should also ensure that its products remain aligned with evolving consumer tastes.
Shares are trading at a slim margin to our $122 fair value estimate, which incorporates around 3% sales growth (with price/mix contributing more than half of these gains) and high-teens operating margin on average over our forecast. However, if Pepsi's shares were to falter as it executes its plans to support momentum in the beverage business, we would return to viewing the name as an attractive opportunity.
PepsiCo is a food and beverage company. The company's segments include: Frito-Lay North America, which includes food and snack businesses in the United States and Canada; Quaker Foods North America, which includes cereal, rice, pasta and other food businesses in the United States and Canada; PepsiCo Beverages North America, which includes beverage businesses in the United States and Canada; Latin America, which includes beverage, food and snack businesses in Latin America; Europe, which includes beverage, food and snack businesses in Europe; and Africa, Middle East and South Asia, which includes beverage, food and snack businesses in Africa, the Middle East and South Asia.
Morningstar, Inc. is a leading provider of independent investment research in North America, Europe, Australia, and Asia. The company offer an extensive line of products and services for individual investors, financial advisors, asset managers, and retirement plan providers and sponsors.
Morningstar provides data on approximately 530,000 investment offerings, including stocks, mutual funds, and similar vehicles, along with real-time global market data on more than 18 million equities, indexes, futures, options, commodities, and precious metals, in addition to foreign exchange and Treasury markets. Morningstar also offers investment management services through its investment advisory subsidiaries and had approximately $185 billion in assets under advisement and management as of June 30, 2016.
We have operations in 27 countries.
Unfortunately, this report is not available for the investor type or country you selected.
Browse all ResearchPool reportsReport is subscription only.
Thank you, your report is ready.
Thank you, your report is ready.