Investing legend Bill Miller once said, "If it's in the papers, it's in the price."
I think there's a lot of truth to this...
Every stock is priced based on the consensus view of the underlying company's future prospects. If the universal view is so negative that the media is putting stories about the company's woes on the front page, there's a real possibility that the negativity is overdone.
This means that the stock might not go down much even if there's more negative news. And it could rally sharply at even the hint of stabilization, much less a genuine turnaround.
This is the perfect investment setup: limited downside and unlimited upside.
Examples abound of blue-chip stocks that have gotten whacked due to temporary setbacks or concerns, and later go on to make 10 times or greater returns.
Think of Apple (AAPL), Amazon (AMZN), and Booking (BKNG) after the Internet bubble burst in 2002... McDonald's (MCD) in 2003... countless stocks in early 2009 and 2020... Netflix (NFLX) in 2012... Apple and Microsoft (MSFT) trading at 10 times forward earnings, respectively, around a decade ago... Meta Platforms (META) in November 2022... The list goes on and on.
With this in mind, let's take a look at PepsiCo (PEP), whose troubles made the front page of the Wall Street Journal yesterday: How Coke Loosened Pepsi's Grip on KFC's Soda Fountains. Excerpt:
Coke could steal a big contract from its rival, cutting Pepsi's reach in fast food. Coke represents around 70% of U.S. carbonated soft-drink fountain sales by volume, according to industry publication Beverage Digest. KFC's chicken competitors, including fast-growing brands Wingstop and Popeyes, serve Coke.
For Pepsi, its beverage business has been slumping. A loss of KFC business would hit close to home: The fast-food chain was once owned by Pepsi...
KFC executives and franchisees then had a decision to make. Both companies' bids were attractive when it came to the numbers, a person familiar with the talks said. Coke stood out for its promises for future sales growth, the person said...
Eventually KFC told both companies that Coke had won the contract.
It's a big loss for Pepsi, the latest in a string of disappointing news that has pushed the stock to an almost six-year low. You can see the decline in this 10-year chart:
Investors are frustrated, as this accompanying WSJ "Heard on the Street" article notes: It's Too Late for Small Fixes at Pepsi. Excerpt:
PepsiCo used to embody everything investors prized in a stock: dependable brands, reliable earnings growth and steady returns.
That reputation is fading. The stock is down about a third from its 2023 peak and trades at its steepest discount to Coca-Cola in more than 25 years.
Activist investor Elliott Management saw an opportunity last year, buying a $4 billion stake and urging Pepsi to streamline its North American snacks and beverage businesses. A year on, the turnaround has yet to deliver.
The problem may be bigger than a few weak brands. Pepsi needs to stop tinkering and consider more fundamental changes, including a spinoff of its bottling operations. Many investors also question whether Ramon Laguarta, CEO since 2018 and chairman since 2019, is the right person to lead it.
Both sides of the business, snacks and beverages, are weak:
Pepsi has tried to revive its North American snacks business with price cuts, new products and more marketing. Volumes edged up last quarter, but the snack unit's operating profit fell 13%, and Pepsi now plans to raise some prices again.
Drinks are worse. "We're not competing well in soft drinks," Laguarta told analysts on the most recent earnings call this month. Volumes fell 2% in the latest quarter, and The Wall Street Journal reported KFC has struck a deal to replace Pepsi with Coca-Cola at thousands of its U.S. restaurants.
Strong international sales have cushioned the blow, but Pepsi still cut its profit outlook for the second time this year.
This chart from the article shows the unprecedented divergence in the forward price-to-earnings multiple between Coca-Cola (KO) and PepsiCo, with the latter close to its lowest level in 14 years:
I took a look at PepsiCo last year on September 11 and September 12. In the latter, I concluded that it was much too soon to buy PepsiCo's stock for three reasons:
- It's not clear how big an impact the GLP-1 weight-loss drugs will have on both its beverages and snack-foods businesses...
- It's not clear whether the company will adopt Elliott's ideas (most importantly, spinning off its bottlers)...
- And even if PepsiCo does adopt the ideas, it will likely be a long and difficult process – resulting in uncertainty and earnings misses that will knock the stock down to a more attractive level.
It was a great call, as PEP is down 6.9% since then. Meanwhile, the S&P 500 Index and KO have risen 16.6% and 39.4%, respectively:
But with PepsiCo's stock (and multiple) down so much, might it be a buy today? Let's take a look at the latest historical financials...
PepsiCo is an excellent business, with high and stable margins:
Revenue and operating income have grown nicely over time, and it's good to see an uptick in the past year after two years of stagnation:
Free cash flow ("FCF") has also risen to an all-time high of $10.5 billion:
The company primarily uses its FCF to pay a healthy dividend (currently yielding 4.4%), make an occasional acquisition, and buy back a bit of stock:
PepsiCo is also paying down a bit of debt, which is good to see:
Overall, I'm pleasantly surprised by what I'm seeing. Given the negative headlines, I was expecting stagnant, if not declining, performance. But instead, the numbers are all trending positively.
With the stock at around $134.22 this morning and consensus analysts' estimates of $8.64 per share for 2027, the stock is trading at only 15.5 times forward earnings. As noted above, that's close to a 14-year low.
I think the stock is interesting here – certainly more so than KO at 26.4 times forward earnings.
My team at Stansberry Research and I will take a closer look at PepsiCo. If we decide to recommend it in an upcoming monthly issue of Stansberry's Investment Advisory, as always, our subscribers will be the first to know. You can become one by clicking here.
Best regards,
Whitney
P.S. I welcome your feedback – send me an e-mail by clicking here.