PepsiCo Completes Major Breakout Pattern

PepsiCo Inc. (PEP) has completed a multiyear breakout pattern and could post impressive upside in coming quarters. Taken together with a 2.90% annual dividend yield and the relative safety of this defensive sector, patient investors could generate stronger annual returns than many so-called growth stocks. That’s especially true after 2020’s red-hot momentum market lifted many equities to unsustainable price levels.

Looking for Multiple Expansion

Beverage plays are no longer cheap, with PepsiCo’s absolute valuation situated near the upper boundary of the historical range. However, the stock looks more attractive when viewed over the last three years, with relative valuation below the 36-month midpoint. Modest multiple expansion looks more than achievable in this view, with the potential for price appreciation between 15% and 20% in the next 12 months.

UBS analyst Sean King recently upgraded the stock to ‘Buy’, listing reasons why investors should take a close look at the beverage giant. He believes the company is “at the mid-point of an investment cycle that will yield a sustainable improvement to top and bottom line growth”. King also reviewed the spreadsheets, noting that “investments in beverage margins and global snacking scale support our above Street outlook for 2021-23 sales growth of 5.7% and EPS growth of 10.0%”.

Wall Street and Technical Outlook

Wall Street consensus has improved since the start of 2021, now standing at an ‘Overweight’ rating based upon 11 ‘Buy’, 2 ‘Overweight’, 9 ‘Hold’, and 1 ‘Underweight’ recommendation. No analysts are recommending that shareholders close positions and move to the sidelines. Price targets currently range from a low of $135 to a Street-high $165 while the stock is set to open Wednesday’s session about $7 below the median $155 target.

PepsiCo broke out above a 5-year rising highs trendline in January 2020 and failed the breakout during the pandemic decline, which dumped price more than 30%. The subsequent recovery finally completed a 100% retracement into the prior high at year’s end, giving way to a reversal that posted a higher low in March. The stock has now returned to resistance for the third time, completing a cup and handle pattern that yields a measured move target in the 190s following a breakout.

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Disclosure: the author held no positions in aforementioned securities at the time of publication.