Will Pepsi Explode Higher?

The Cheat Sheet

With shares of Pepsi (NYSE:PEP) trading around $80, is PEP an OUTPERFORM, WAIT AND SEE or STAY AWAY? Let’s analyze Pepsi’s stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Pepsi is a global food and beverage company. The company is organized into four business units: PepsiCo Americas Foods , which includes Frito-Lay North America, Quaker Foods North America and all of its Latin American food and snack businesses; PepsiCo Americas Beverages; PepsiCo Europe; and PepsiCo Asia, Middle East and Africa. It manufactures, markets, and sells a range of convenient, sweet, salty, and grain-based snacks; carbonated and non-carbonated beverages; and dairy products and other foods. Through its units, Pepsi is able to provide its in-demand products to consumers across the globe at competitive prices. Growth in emerging markets are the leading trend in Pepsi’s business.

T = Technicals on the Stock Chart are Strong

Pepsi has been in a consistent trend of higher highs and higher lows over the last two decades. The stock has just recently traded at all-time high prices and sees no signs of slowing. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Pepsi is trading above all of its rising key averages, which signals bullish price action in the near-term.

Taking a look at the implied volatility (red) and implied volatility skew levels of Pepsi options may help determine if investors are bullish, neutral, or bearish.

Implied Volatility (IV)

30-Day IV Percentile

90-Day IV Percentile

Pepsi Options

16.83

86%

87%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts, as compared to the last 30 and 90 trading days.

Put IV Skew

Call IV Skew

May Options

Average

Average

June Options

Average

Average

As of today, there is an average demand from call buyers or sellers and average demand from put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral over this time period.

E = Earnings Are Mixed Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Pepsi’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Pepsi look like, and more importantly, how did the markets like these numbers?

2012 Q4

2012 Q3

2012 Q2

2012 Q1

Earnings Growth (Y-O-Y)

17.78

-3.2%

-19.66%

0%

Revenue Growth (Y-O-Y)

-1.04%

-5.29%

-2.2%

4.1%

Earnings Reaction

1.09%

-0.28%

2.19%

-0.44%

Pepsi has seen mixed earnings and revenue growth rates over the last four quarters.

P = Excellent Relative Performance Versus Peers and Sector

How has Pepsi stock done relative to its peers, Coca-Cola (NYSE:KO), Dr Pepper Snapple (NYSE:DPS), Monster Beverage (NASDAQ:MNST), and sector?

Pepsi

Coca-Cola

Dr. Pepper Snapple

Monster Beverage

Sector

Year-to-Date Return

15.46%

9.36%

3.75%

1.77%

10.18%

Year-to-date, Pepsi has led its peers and sector by a wide margin.

Conclusion

Pepsi is a global giant which provides beverage and food items to consumers who have not eased demand one bit. The demand for its products has generated a rise in earnings and revenue that has generally pleased investors. Currently, Pepsi’s stock is trading near all-time high prices, and relative to its peers and sector, Pepsi has been a leader. Look for Pepsi to continue to OUTPERFORM.

Using a solid investing framework such as this can help improve your stock-picking skills. Don’t waste another minute — check out these valuable stock ideas now:

Rates

View Comments (1)