PepsiCo Inc. on Breakout Watch, New Highs Eminent

Key Points

• PepsiCo Inc. gets another price target increase so it's on track to hit all-time highs. 
• The consensus for earnings is robust but cautious, given the trends. 
• The stock trades at a high multiple but pays a safe and growing dividend. 

PepsiCo Inc. NASDAQ: PEP, blue-chip consumer staple and Dividend King, has been trending higher and will soon break out to new highs. The analyst-driven trend is due to the company’s diversification strategy and dominance of the snack food aisle. The analysts have issued a steady string of price target increases over the last few years that have added 25% to pre-pandemic price levels, and more is on the way. 

Due to the valuation, the analysts' sentiment in PepsiCo stock slipped to a strong "hold" from "buy" over the past year. Trading at roughly 25 times earnings, it is not a value any way you look at it, but you get a lot for what you pay for.

PepsiCo is the world’s largest consumer products company, paying a healthy, growing dividend. The latest analyst report comes from JPMorgan Chase & Co., reiterating an "overweight" rating with a price target of $196. That’s a 6% increase from the previous target and more than 10% above the current Marketbeat.com consensus. 

The consensus doesn’t offer much upside, but it is trending higher compared to last year, last quarter and last month, providing ample market support. The most recent targets are all above the consensus. Many of them, including JPMorgan’s, are above the all-time high.

A Catalyst in the Earnings Report 

The next visible catalyst for PepsiCo is the first quarter earnings report due in late April. The company is expected to grow top-line revenue by 6.6% and widen its margin. The $1.39 consensus EPS is up 7.7% year-over-year; both figures could be light. 

Analyst Filippo Filorni of Citigroup put PepsiCo on a 30-day catalyst watch citing an expectation for outperformance. In his view, scanner data suggests the company could significantly outpace expectations in both the PepsiCo and Frito-Lay segments. He also expects pricing power to drive margin expansion and bottom-line results leading to an increase in guidance. He expects the news to drive another round of price target increases, leading the stock to a new all-time high.

“All together, we expect these strong results, coupled with potentially raised guidance, will drive the stock higher,” Falorni concluded in his letter to shareholders. 

PepsiCo Invests in the Future 

PepsiCo unveiled a new logo while announcing plans for the future in late March. The new logo should focus on Pepsi’s zero-sugar alternatives and help usher in a more modern age for the business. Along with the logo, PepsiCo plans to invest in Web 3.0 and the metaverse to achieve its goals. The company also enhances sustainability by using 100% recycled polyethylene terephthalate (PET) for its bottles.

PepsiCo isn’t a value, but it pays a decent yield of 2.5% and has 50 years of annual distribution increases to its credit. The payout ratio is high at 66% but manageable, leaving room for additional growth. Investors shouldn’t expect robust increases, but low single-digit increases will likely continue. 

The chart looks good. The market is volatile but trending higher and showing support at a clear trend line. The current bounce looks like a bullish flag, which could add another $15 to the price if confirmed. If not, this stock may be range bound at these levels until another catalyst emerges.