PepsiCo - Part 3
The Story coming out of this can of Pepsi
Last week we valued PepsiCo, a Dividend King with over 50 years of increased dividends.
In that valuation we came to the conclusion that I might have overpaid for the shares I purchased.
Today we’re going to have a look at this companies story. We will be going over the risk factors, its prospects in the near future, and what my next steps regarding it will be.
The Risk Factors
Every company has risks inherent to them and PepsiCo is no different.
Fortunately there is an easy way to find them out, we just need to read their annual report.
There’s plenty of risks outlined there, but I’ll outline the ones I find more important:
The impact of COVID-19 continues to create considerable uncertainty for our business.
Changes in the retail landscape or in sales to any key customer can adversely affect our business.
Disruption of our supply chain may adversely affect our business.
Our business can be adversely affected if we are unable to grow in developing and emerging markets.
Taxes aimed at our products can adversely affect our business or financial performance.
Limitations on the marketing or sale of our products can adversely affect our business and financial performance.
Each of these risks are fairly self-explanatory, but they can be roughly separated into 3 categories:
Operational impacts - Which include Covid-19 related problems, supply chain issues, etc…
Business Strategy impacts - Which include changes in consumer demands, and business expansion and general future-proofing related issues
Legal impacts - Which go from higher taxes to crackdowns on “unhealthy food” like we’ve been seeing throughout the developed world.
All of these can be problematic, but I would say most can be addressed by management in some way.
The Near Future Prospects
Some of risks described above have clear paths towards being minimized, and from their latest shareholder letters it is clear that management has their eye on the ball:
This is a clear step towards minimizing the impact of any environmental or health related regulation that might be incoming.
Will they succeed at every step?
I doubt it. But the mere fact that they are making a public effort towards it means that it reduces the urgency or the strictness of that regulation, allowing some political breathing room. Additionally it will put them ahead of competitors who aren’t taking those steps.
The rest of the letter is also quite good, and I would encourage you to go through it.
In all, all of the issues mentioned above are addressed, and while the words of management alone can’t be trusted entirely, since they tend to paint a rosy picture of themselves, it’s clear at least that they have plans to grow their revenues, diversify their income streams and resolve the supply chain issues that are currently plaguing the industry.
Only time will tell if those plans will be enough.
The Next Steps
So, I clearly purchased PepsiCo at a price that is not in line with its fundamentals, and the question now is, “is there anything in the near future that will meaningfully change those fundamentals for the better?”.
So far, I honestly can’t find one.
It’s not that I think that it’s a bad company, but the reason I originally bought it for (greater diversification than Coca-Cola and higher dividend growth) seems unlikely to carry on in the future since it is clear that its fundamentals aren’t going to be able to sustain it.
While I’ve been fortunate enough to see it become even more highly priced after I purchased, I’m still having trouble understanding where it will go from now on, and the answer seems to be “down”.
I haven’t made up my mind yet, but I am seriously considering reviewing my position at the end of the year, and cutting my most overvalued positions, of which PepsiCo is one.
While I’ll suffer some dead-weight loss due to taxes, I think I might be able to put that money to better use elsewhere, either in my existing holdings, or perhaps a new one I might open (or maybe I’ll just shift it over to my Index funds).
Whatever the case may be, I will be sure to let you know on my Twitter, so give me a follow if you’d like to be up to speed.
What about you? Are you bullish on PepsiCo? Do you think they can make a turn around and bring up their earnings growth?
Let me know if the comments below!