tiprankstipranks
PepsiCo Stock: Limited Upside Potential
Stock Analysis & Ideas

PepsiCo Stock: Limited Upside Potential

PepsiCo (PEP) is a beverage and food company that operates internationally. It owns brands such as Lay’s, Doritos, Gatorade, Mountain Dew, and of course Pepsi, to name a few. We are neutral on the stock.

Measuring Efficiency

PepsiCo needs to hold onto a lot of inventory in order to keep the business running. Therefore, the speed at which a company can move inventory and convert it into cash is very important in predicting success.

To measure its efficiency, we will use the cash conversion cycle, which shows how many days it takes to convert inventory into cash. It is calculated as follows:

CCC = Days Inventory Outstanding + Days Sales Outstanding – Days Payables Outstanding

PepsiCo’s cash conversion cycle is -115, meaning the company converts inventory into cash before having to pay suppliers. Basically, PepsiCo doesn’t have to put up any money to finance inventory purchases because it can move its inventory and collect the payments while still on credit. Thus, PepsiCo’s suppliers are essentially financing its operations.

In addition to the cash conversion cycle, let’s also take a look at PepsiCo’s gross margin trends. Ideally, we would like to see a company’s margins expand each year. This is, of course, unless gross margins are already very high, in which case it is acceptable for them to remain flat.

Image created by the author

In PepsiCo’s case, we can see that gross margins have remained relatively flat in the past several years with a very slight decline. This is acceptable because the company is mature and small fluctuations are to be expected.

In addition, margins were likely impacted by COVID-19 measures along with supply chain issues as opposed to competitors chipping away at PepsiCo’s profitability.

Risks

To measure PepsiCo’s risk, we will first check to see if financial leverage is an issue. We do this by comparing its total debt-to-free cash flow. Currently, this number stands at 6.17.

In addition, when looking at historical trends, we can see that the total debt-to-free cash flow ratio has been trending up. In 2014, this metric stood at 3.78 and has risen almost steadily since then.

Overall, we don’t believe that debt is currently a material risk for the company because its interest coverage ratio is 11.1 (calculated as EBIT divided by interest expenses).

However, there are other risks associated with PEP. According to Tipranks’ Risk Analysis, PepsiCo disclosed 29 risks in its most recent earnings report. The highest amount of risk came from the Legal & Regulatory category.

The total number of risks has increased over time, as shown in the picture below.

Wall Street’s Take

Turning to Wall Street, PepsiCo has a Moderate Buy consensus rating, based on two Buys and three Hold ratings assigned in the past three months. The average PepsiCo price target of $180.20 implies 2.7% upside potential.

Analyst price targets range from a low of $165 per share to a high of $195 per share.

Conclusion

Pepsi is an efficiently run company with a dominant position in the food and beverage industry. That said, it doesn’t seem like there is much upside potential based on analysts’ consensus. As a result, we remain neutral on the stock.

Download the TipRanks mobile app now

​To find good ideas for stocks trading at attractive valuations, visit TipRanks’ Best Stocks to Buy, a newly launched tool that unites all of TipRanks’ equity insights.

Read full Disclaimer & Disclosure

Trending

Name
Price
Price Change
S&P 500
Dow Jones
Nasdaq 100
Bitcoin

Popular Articles