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Why Sterne Agee Downgraded PepsiCo to ‘Neutral’

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Price movement of PepsiCo

PepsiCo (PEP) has a market cap of $142.2 billion. PEP fell by 2.3% to close at $98.36 per share on February 26, 2016. The stock’s price movement on a weekly, monthly, and year-to-date (or YTD) basis is -1.2%, 2.5%, and 1.6%, respectively.

Currently, PEP is trading 0.31% below its 20-day moving average, 0.07% above its 50-day moving average, and 2.1% above its 200-day moving average.

The iShares Russell Top 200 Growth ETF (IWY) invests 1.9% of its holdings in PepsiCo. The ETF tracks an index of US large-cap growth stocks selected from 200 of the largest US companies by market cap. The YTD price movement of IWY was -5.5% as of February 25, 2016.

The iShares Russell 1000 Growth ETF (IWF) invests 1.4% of its holdings in PepsiCo. The ETF tracks an index of US large-cap and mid-cap stocks selected from the Russell 1000 Index with the highest growth characteristics based on Russell’s style methodology.

The market caps of PepsiCo’s competitors are as follows:

  • The Coca-Cola Company (KO): $187.6 billion
  • Mondelez International (MDLZ): $64.7 billion
  • Dr Pepper Snapple Group (DPS): $17.3 billion
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Sterne Agee downgraded PepsiCo

Sterne Agee has downgraded PepsiCo’s rating from “buy” to “neutral” due to a fall in performance in fiscal 4Q15 and fiscal 2015.

Performance of PepsiCo in recent fiscal 4Q15 and fiscal 2015

PepsiCo reported fiscal 4Q15 net revenue of $18,585.0 million, a fall of 6.8% compared to net revenue of $19,948.0 million in fiscal 4Q14. Its net income and EPS (earnings per share) rose to $1,718.0 million and $1.17, respectively, in fiscal 4Q15 compared to $1,311.0 million and $0.87, respectively, in fiscal 4Q14.

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Fiscal 2015 results

In fiscal 2015, PEP reported net revenue of $63,056.0 million, a fall of 5.4% YoY (year-over-year). It reported Venezuela impairment charges of $1,359.0 million in fiscal 2015. Its net income and EPS fell to $5,452.0 million and $3.67, respectively, in fiscal 2015 compared to $6,513.0 million and $4.27, respectively, in fiscal 2014.

Meanwhile, its cash and cash equivalents rose by 48.3%, and inventories fell by 13.5% in fiscal 2015. Its current ratio and debt-to-equity ratio rose to 1.3x and 4.8x, respectively, in fiscal 2015 compared to 1.1x and 3.0x, respectively, in fiscal 2014.

The PE (price-to-earnings) and PS (price-to-sales) ratios of PepsiCo are 26.7x and 2.3x, respectively, as of February 26, 2016.

Projections

The company has made the following projections for fiscal 2016:

  • Organic revenue growth will be ~4% excluding the impact of the 53rd week. Based on current foreign exchange market consensus rates, foreign exchange is expected to negatively impact reported net revenue growth by 4% while the 53rd week in 2016 is expected to contribute ~1% to reported net revenue growth.
  • Core EPS will be $4.66, which includes productivity savings of ~$1 billion, higher net interest expenses driven by higher debt balances, and lower corporate unallocated expense driven primarily by lower pension expense.
  • Net capital spending will ~$3 billion.
  • The company expects more than $7 billion in free cash flow excluding certain items.
  • Cash flow from operating activities will be over $10 billion.
  • The company expects share repurchases of ~$3 billion.
  • The company also increased annualized dividends to $3.01 per share, a rise of 7.1% on its common stock with the dividend expected to be paid in June 2016. Total dividends to shareholders are expected to be ~$4 billion.

Now let’s take a look at Monster Beverage.

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