According to a filing with the SEC, Shona Brown, who sits on the Board of Directors at PepsiCo, Inc. (NYSE:PEP), directly purchased 1,000 shares of stock on February 27th at an average price of $75.33 per share. While recently we have been spending much of our time tracking the latest round of 13f filings and applying our proprietary investment strategies (for example, our finding that the most popular small cap stocks among hedge funds outperform the S&P 500 by an average of 18 percentage points per year), we do also track insider purchases and found the investment in as large a company as Pepsi to be of interest. Insider purchases are, on average, bullish signals (read more about studies on insider trading) and we think that this is because insiders have to be somewhat confident in the company’s prospects in order to ignore the benefits of diversification.
In the fourth quarter of 2012, Pepsico’s revenues dipped 1% compared to the same period in the previous year but reduced costs caused earnings for the quarter to rise 17%. For the year as a whole, sales declined 2% (after having risen 15% in 2011) and net income was down 4%; however, there was a 53rd week in the 2011 year and this accounts for much of the changes. Operating profits were led lower by poor numbers in Quaker Foods, American beverages, and Asia/Middle East/Africa, which were only partially offset by improved operating income in Europe.
At its current price, Pepsi carries trailing and forward P/Es of 19 and 16, respectively. At that pricing it would have to achieve significant earnings growth in order to be a good value, and while Q4 looked good we would want to see more evidence of improvement particularly after a generally flat year. We would note that several PepsiCo, Inc. insiders were selling shares in February; insider sales are generally not as strong signals as purchases, since it can be smart for insiders to diversify their wealth away from their company, but this factor is worth noting.
Renaissance Technologies, founded by billionaire Jim Simons, initiated a position of 2.6 million shares in PepsiCo, Inc. in the fourth quarter of 2012 (see Renaissance’s stock picks). Billionaire Ken Fisher’s Fisher Asset Management sold a small number of shares but was still one of the largest shareholders in our database of 13F filings, with 8.3 million shares at the end of December (find Fisher’s favorite stocks). Platinum Asset Management, which is managed by billionaire Kerr Neilson, reported owning 2.8 million shares (check out more stocks Platinum owns).
How does Pepsi compare to its peers (financially)?
We can compare Pepsi to The Coca-Cola Company (NYSE:KO), Dr Pepper Snapple Group Inc (NYSE:DPS), Monster Beverage Corp (NASDAQ:MNST), and Mondelez International Inc (NASDAQ:MDLZ) with Mondelez representing a comp for the snacks business. Coca-Cola is priced at only a small premium to Pepsi though of course its brand is generally considered stronger (it also grew both its revenue and earnings in Q4 2012 versus a year earlier). Monster has been the growth story of the beverage business, and at 27 times trailing earnings the market is pricing in more improvement; however, its earnings growth was actually somewhat modest last quarter. Revenue was up, however, so we would need to look deeper before deciding if it is in fact overvalued. Dr. Pepper Snapple is the value play of beverages, with a trailing P/E of 15, though its business has been about flat and it is generally thought of as not including as strong brands as Pepsi. Mondelez, which was created in the breakup of Kraft, is at about the same valuation level as Dr. Pepper Snapple and sell-side analysts are forecasting little growth there.
If Pepsi can continue the earnings growth it experienced last quarter, then it will turn out to have been a good value at the current price. However, considering that the year as a whole was not particularly strong and that revenue growth was well below earnings growth, we doubt that the most recent report represents a new normal for the company. As a result we’d suggest keeping this insider purchase in mind but waiting to hear for good news from Pepsi before considering a purchase.
Disclosure: I own no shares of any stocks mentioned in this article.
