Update PepsiCo (PEP)
Is the stock market entering a more defensive phase with “safe” sectors such as consumer goods set to outperform for a while? Looks like it to me on the recent data on which sectors have turned hot and which are cooling off.
(See my October 1 post http://jubakpicks.com/2009/10/01/in-the-very-very-very-short-term-the-stock-market-has-gone-defensive/ for some of that data.)
And I got more confirmation from the big pop shares of “safe” PepsiCo (PEP) got this morning after an upgrade from Deutsche Bank. The upgrade wasn’t huge–the bank raised its 12-month target price to $70 from $66–but the stock is up $2.47 a share or 4.2% as of 12:40 p.m. (ET) on what isn’t particularly striking news. To me that shows that there are a lot of investors out there who, right now, want to lower their risk but stay in stocks.
I’m going to raise my target price on this evidence that safe consumer stocks are back in favor.
In raising its target price Deutsche Bank cited its reading of a recent filing by PepsiCo with the Securities & Exchange Commission that implied lower interest expenses and lower depreciation than they had expected as a result of PepsiCo’s acquisition of bottlers PepsiAmerica and Pepsi Bottling Group. As a result the bank raised its 2010 earnings forecast to $4.20, an increase of 4 cents. (See I told you this wasn’t exactly earth-shaking news.)
More importantly Deutsche Bank also said that they think there could well be more increases to earnings estimates ahead from a potential tailwind from a weak U.S. dollar and lower costs for key raw materials. With investors getting edgy about prospects for earnings growth in the fourth quarter and in 2010 that’s a compelling story.
As of October 2, 2009, I’m raising my target price for Pepsico to $68 a share by June 2010 from my previous target of $62 by March 2010.
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And think how much money they’ll save by not advertising!
I like PEP and have profited nicely from it for many years but I must say that when it got that pop on what was, as Jim says, a pretty weak upgrade I sold it. The upside to the new “target” is not really that great and is masked a little by the relatively high absolute price. When a Wall St firm tells me the upside target is a 10% gain I am not impressed. That being said, I will be buying it back (cheaper) and if you choose to just hang on and clip the dividend for a while you will probably do better than any fixed income alternative. There are better bets, however.