Saturday, December 28, 2013

Will Pepsi Continue This Bullish Run?

With shares of Pepsi (NYSE:PEP) trading around $82, is PEP an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let's analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Pepsi operates as a food and beverage company worldwide. The company is organized into four business units: PepsiCo Americas Foods, PepsiCo Americas Beverages, PepsiCo Europe, and PepsiCo Asia, Middle East and Africa. It manufactures, markets, and sells a range of salty, convenient, sweet and grain-based snacks, carbonated and non-carbonated beverages, dairy products, and other foods. Convenience foods are seeing significant demand worldwide as consumers in growing economies are opting for these products. Pepsi stands to see a continued rise in profits for many years as a leading provider of quick, convenient, inexpensive, and enjoyable products worldwide.

On Wednesday, Pepsi reported core earnings per share of $1.24 for the third quarter. “We're pleased with our performance. PepsiCo has delivered double-digit core constant currency earnings per share growth year to date, despite ongoing macro-economic volatility in many markets. We're able to perform well in these conditions because our brands are strong, our product portfolio is on-trend, and our geographic footprint is broad and diverse. Importantly, we have continued to make marketplace investments to strengthen our foundation for sustainable growth,” said Chairman and CEO Indra Nooyi.

T = Technicals on the Stock Chart Are Strong

Pepsi stock has seen a consistent uptrend in the last several years. The stock is currently trading sideways as it digests gains from a recent run. The stock has made new all-time highs just about every year and looks to be headed there this year as well. 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 slightly above its key averages, which signal neutral to bullish price action in the near-term.

PEP

(Source: Thinkorswim)

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

17.42%

0%

0%

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

Put IV Skew

Call IV Skew

November Options

Flat

Average

December Options

Flat

Average

As of today, there is an average demand from call buyers or sellers and low demand by put buyers or high demand by put sellers, all neutral to bullish over the next two months. To summarize, investors are buying a very small amount of call and put option contracts and are leaning neutral to bullish over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing 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?

2013 Q3

2013 Q2

2013 Q1

2012 Q4

Earnings Growth (Y-O-Y)

1.65%

36.17%

-2.82%

18.81%

Revenue Growth (Y-O-Y)

1.54%

2.12%

1.23%

-1.01%

Earnings Reaction

1.76%*

-0.64%

3.04%

1.09%

Pepsi has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been optimistic about Pepsi’s recent earnings announcements.

* As of this writing

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

19.63%

4.55%

0.81%

6.30%

3.87%

Pepsi has been a relative performance leader, year-to-date.

Conclusion

Pepsi provides convenient and affordable beverage and food items to consumers in a multitude of countries around the world. A recent earnings release has investors upbeat about the company. The stock has been moving higher in recent years and is now consolidating near highs for the year. Over the last four quarters, earnings and revenues have been rising which has left investors optimistic about earnings announcements. Relative to its peers and sector, Pepsi has been a year-to-date performance leader. Look for Pepsi to OUTPERFORM.

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