PepsiCo does not lose its excitement
Once a soft drink is opened, it loses its fizziness after a few days and a bit of its taste in the process. Unlike his billion dollar Sierra Mist and Pepsi drinks, PepsiCo (NASDAQ: PEP) shows no signs of losing its “sparkle” or momentum as a company.
But does that make the stock a buy for dividend growing investors right now? Let’s look at PepsiCo’s operating results, balance sheet and valuation to decide.
Third quarter results are far from stable
PepsiCo managed to exceed analysts’ expectations for revenue and non-GAAP earnings per share (EPS) in the third quarter.
Starting with net sales, PepsiCo grew 11.6% year-over-year to $ 20.2 billion in the third quarter. It should be noted that PepsiCo’s reported revenue was 4% higher than analysts’ third-quarter estimates of $ 19.4 billion.
PepsiCo’s robust revenue growth was driven by increased volumes in its food / snack and beverage business. At this point, PepsiCo’s food / snack volumes were up 4% in the third quarter, while its beverage volumes were up 8%.
The other thing that propelled PepsiCo’s net sales up was the price increases which CFO Hugh Johnston said partly occurred over the summer during the earnings call. Q3 2021 from PepsiCo. And as the company expects to pass more raw material inflation on to consumers later this year in the beverage and snack business, it has the pricing power to keep its revenues up.
On the earnings side, PepsiCo’s non-GAAP EPS rose 7.8% year-on-year to $ 1.79 in the third quarter. That topped analysts’ forecast of $ 1.73 in non-GAAP EPS for the third quarter by 3.5%.
Due to its better-than-expected third quarter, PepsiCo raised its organic revenue outlook for the full year from previous forecast growth of 6% to 8% for this year. Unlike net sales, organic sales take into account the effect of foreign currency translation, as well as acquisitions and disposals. Considering that PepsiCo has seen organic revenue growth of 8% in the first three quarters of this year, that seems like a forecast based on reality.
PepsiCo also raised its outlook for full-year non-GAAP EPS growth from previous guidance from 11% to at least 11% for this year. That would represent an advance of $ 5.52 in non-GAAP EPS last year to at least $ 6.20 in non-GAAP EPS this year.
A solid balance sheet
PepsiCo’s growth forecast for this year looks sound. But can the same be said of its record? Let’s take a look at PepsiCo’s net debt versus earnings before interest, taxes, depreciation and amortization (EBITDA) and interest coverage ratio to find out.
PepsiCo’s net debt at the end of the third quarter was $ 30.5 billion, or $ 37 billion in long-term debt less $ 6.5 billion in cash. By annualizing the $ 10.8 billion in EBITDA that PepsiCo generated in the first nine months of this year, this equates to $ 14.4 billion in EBITDA. Thus, PepsiCo’s net debt to EBITDA ratio is 2.1, which means it could cover all of its net debt with EBITDA in just over two years.
The interest coverage ratio is a useful measure to assess the creditworthiness of a stock. The interest coverage ratio is calculated as EBIT divided by interest expense.
PepsiCo’s interest coverage ratio fell from 9.5 in the first nine months of last year ($ 7.50 billion in EBIT / $ 789 million in interest expense) to 12.3 in the first nine months of this year ($ 8.96 billion EBIT / $ 731 million interest expense). PepsiCo can easily cover its interest costs with EBIT, which means it is expected to remain in business for the foreseeable future.
A top-notch title that is fairly valued
PepsiCo is the very definition of a blue chip stock, as evidenced by the fact that it has increased its dividend for 49 consecutive years. That places him comfortably among five dozen others. S&P 500 stocks that have increased their dividends for at least 25 years, making PepsiCo a dividend aristocrat. With a dividend hike likely slated for next year, PepsiCo is also poised to become a dividend king.
Given that analysts expect PepsiCo to generate $ 6.34 in non-GAAP EPS over the next four quarters and the current share price is $ 160, the forward price-to-earnings ratio of PepsiCo is 25.3. That’s a bit higher than the S&P 500’s forward P / E ratio of 21.3, but I think this premium is deserved given how good PepsiCo is.
PepsiCo is offering investors a return 2.7% above the market, which is positioned to grow in line with the single-digit annual profit growth analysts are forecasting over the next five years.
This article represents the opinion of the author, who may disagree with the “official” recommendation position of a premium Motley Fool consulting service. We are motley! Challenging an investment thesis – even one of our own – helps us all to think critically about investing and make decisions that help us become smarter, happier, and richer.