Do Pepsi Shares Have Any Pop Left?

tdp2664
InvestorPlace
PepsiCo (NYSE: PEP ) recently hit a new 52-week high and currently sports a $112 billion market capitalization. And with CEO Indra Nooyi pushing Pepsi to develop healthier snacks and drinks that still taste great, is PepsiCo stock poised to pop — or has it peaked? Last Thursday, Pepsi shares hit $71.27, capping a two-month rise of 16% after a fairly dull year of gaining less than 5%. Investors may have been pleasantly surprised by its first-quarter earnings. Although Pepsi’s net income fell  20% to $1.14 billion compared to the previous year, its adjusted profit beat analysts’ estimates by a penny. And revenue rose 27% to $11.9 billion — beating analysts’ estimates by 2%. Moreover, Pepsi announced good news for the rest of 2011: It expects 7% or 8% EPS growth over 2010′s $4.13, despite commodity cost inflation of between 7.8% and 8.9% on its $18 billion base of commodity-based input costs. The reason for the continued EPS optimism is that Pepsi plans to boost prices during the peak soft drink selling season that begins after the Fourth of July. Meanwhile, Pepsi is investing in new products that it believes will encourage more people to buy more of its products to fulfill Nooyi’s adage, “ performance with purpose .” According to the New Yorker , Pepsi is developing products that contain less salt and sugar while preserving the taste experience that makes consumers keep coming back for more. It is also developing so-called functional foods — such as the different versions of Gatorade for the periods before, during, and after you exercise. Do such products mean that you should stuff Pepsi into your portfolio? To help with that decision, we can look at its price-to-earnings-to-growth (PEG) ratio — a way to determine whether the value that the market assigns a stock is justified by the rate at which it expects the company’s earnings to grow. I think a PEG of 1 is a fair price and anything below that is a bargain. Pepsi’s PEG of 2.11 makes it pretty expensive. Its P/E is 19 and Pepsi’s earnings are expected to grow 9% in 2012 to $4.90 a share. Pepsi’s stock yields 2.91%, but at its current price, unless it can accelerate its earnings growth with those new products, Pepsi’s stock may well have peaked. Peter Cohan has no financial interest in the securities mentioned.