The share price of PepsiCo (PEP -0.62%) has dropped significantly in 2020, declining 22% year to date, which is nearly 10 percentage points better than the S&P 500 decline of 31.5%. As the global reaction to the coronavirus continues to wreak havoc in the economy, investors need to find shelter in well-diversified companies with healthy balance sheets and the potential for growth despite the pandemic.
PepsiCo checks each of these boxes and continues to hold substantial market share in several categories. Here are three reasons you should purchase PepsiCo during the economic downturn.
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1. A multibillion-dollar acquisition to expand offerings
The coronavirus isn't stopping PepsiCo from growing, as it announced an agreement on March 11 to purchase Las Vegas-based Rockstar Energy for $3.85 billion. With over 30 energy drink variants of RockStar energy sold in over 30 countries, this move was both strategic and necessary.
PepsiCo had a contract with Rockstar as a distributor, which prevented PepsiCo from stepping into the energy drink market or partnering with companies within the energy drink segment. Acquiring Rockstar will give PepsiCo a direct connection to the energy drink market. Allied Market Research predicts a 7.2% compound annual growth rate (CAGR) of the global energy drink market through 2026 -- expanding from a market size value of $53 billion in 2018 to $86 billion in 2026.
PepsiCo plans to continue pushing the already popular Mountain Dew beverage even further, as PepsiCo can enhance the current variants of GameFuel and Kickstart, introducing new flavors and variants into the energy beverage market. PepsiCo CEO Ramon Laguarta noted that the acquisition was:
... a highly strategic acquisition that will enable PepsiCo to leverage capabilities to both accelerate Rockstar's performance and unlock the ability to expand in other categories and existing brands such as Mountain Dew.
The acquisition approval is set to be finalized during the first half of 2020, and PepsiCo stated during the press release that both earnings per share and revenue for 2020 are not predicted to be affected because of the acquisition.
2. A long list of dominating brands distributed globally
The merger between PepsiCo and Frito-Lay in 1965 was, as the founder of PepsiCo, Donald Kendall, and founder of Frito-Lay, Herman Lay, stated, "a marriage made in heaven." After 55 years of growing PepsiCo into a global leader in both beverages and snacks, PepsiCo's portfolio now contains 23 product brands generating more than $1 billion annually per brand and selling in more than 200 countries.
PepsiCo is a sum of its parts, containing six divisions separated by geographical territories selling popular brands such as Doritos, Mountain Dew, Lays, Pepsi, Cheetos, Ruffles, Quaker, and Tropicana, to name a few. The mega-brand portfolio consists of 15 brands in the beverage segment and eight in the snacking segment for a total of 23. According to an investor presentation in 2020, PepsiCo stated that 58% of overall revenue was from North America and 42% from international markets -- with the revenue split between snacks (54%) and beverages (46%) globally.
Laguarta stated during an interview in 2019 that the next billion-dollar brand in PepsiCo's portfolio will be the sugar-free Bubly, a sparkling water brand that has witnessed substantial growth for PepsiCo. In 2020, PepsiCo announced that Bubly will be available with caffeine, expanding the already popular 15 flavors and joining alongside rivals Coca-Cola (NYSE: KO) and Nestle in the caffeinated sparkling water segment -- potentially giving PepsiCo 24 brands generating $1 billion in annual sales.
3. A bunch of consumers who are stocking up
Walmart announced a plan to hire 150,000 temporary workers to help with the increased demand from consumers related to the global reaction to the novel coronavirus pandemic, and Amazon is opening 100,000 new roles to fill the increased demand -- investing $350 million globally.
Shelf-stable foods and beverages such as snacks and energy drinks have been flying off the shelves in North America as people stock up to deal with orders and requests to self-isolate to stem the spread of the virus, according to a report from research firm Nielsen. Nielsen expects consumers will continue to stockpile shelf-stable items for the near term, putting increased pressure on the supply chain and manufacturing -- which is great news for PepsiCo.
The recent sell-off has created an opportunity for investors
Despite the stock market sell-off, PepsiCo is expected to continue driving growth. A recent upgrade from investment firm CFRA Research increased the outlook on PepsiCo from buy to strong buy, establishing a price target of $145 and stating that PepsiCo can continue to deliver on earnings and dividend growth.
PepsiCo announced during the investor presentation an expectation to deliver 4% organic revenue growth in 2020 with 7% earnings per share (EPS) growth, in addition to a 7% dividend increase and $2 billion in share repurchases during 2020. After the recent fourth-quarter earnings announcement, PepsiCo revised 2020 EPS guidance of 6% in 2020, predicting slower organic growth than projected. It announced 2020 EPS of $5.88 per share, which was below the originally projected $5.95 per share; however, PepsiCo holds strong on the 4% organic revenue growth for 2020.
PepsiCo will continue to invest in the already-strong brand portfolio, with planned 2020 acquisitions of RockStar energy for $3.85 billion, Africa-based Pioneer for $1.7 billion, and BFY Brands, the maker of PopCorners snacks, for an undisclosed price in 2020 -- expanding the already-strong portfolio.
The current share price of roughly $106 trading at a forward price-to-earnings ratio of 20.5 is a value in comparison to PepsiCo's three-year EPS CAGR of 6.1% and a forward dividend yield of 3.7%. The share price decrease of 22% year to date gives shareholders an opportunity to own a global leader in the snack and beverage segment. In addition, PepsiCo's strong balance sheet is impressive, with a debt-to-EBITDA ratio (which determines the number of years it would take a company to pay off its debt) of 2.43 -- allowing PepsiCo to invest during the market chaos, picking up opportunities to strengthen the company and drive growth beyond the coronavirus pandemic.
