Is Pepsi a Solid Portfolio Play?

With shares of Pepsi (NYSE:PEP) trading around $81, is PEP an OUTPERFORM, WAIT AND SEE, or STAY AWAY? Let's analyze the stock with the relevant sections of our CHEAT SHEET investing framework:

T = Trends for a Stock’s Movement

Pepsi operates as a food and beverage company worldwide. The company is organized into four business units: PepsiCo Americas Foods, PepsiCo Americas Beverages, PepsiCo Europe, and PepsiCo Asia, Middle East, and Africa. It manufactures, markets, and sells a range of salty, convenient, sweet and grain-based snacks, carbonated and non-carbonated beverages, dairy products, and other foods. Convenience foods are seeing significant demand worldwide as consumers in growing economies are opting for these products. Pepsi stands to see a continued rise in profits for many years as a leading provider of quick, convenient, inexpensive, and enjoyable products worldwide.

Pepsi has scored a win over chief rival The Coca-Cola Co. (NYSE: KO), taking the soft drink business at the more than 975 U.S. locations of Buffalo Wild Wings Inc. (NASDAQ: BWLD), according to a report by the New York Times. A formal announcement is expected later Thursday.

T = Technicals on the Stock Chart Are Mixed

Pepsi stock has seen a consistent uptrend in the last several years. The stock is currently pulling back from highs and may need time to consolidate before heading higher. Analyzing the price trend and its strength can be done using key simple moving averages. What are the key moving averages? The 50-day (pink), 100-day (blue), and 200-day (yellow) simple moving averages. As seen in the daily price chart below, Pepsi is trading between its rising key averages, which signal neutral price action in the near-term.

(Source: Thinkorswim)

Taking a look at the implied volatility (red) and implied volatility skew levels of Pepsi options may help determine if investors are bullish, neutral, or bearish.

	Implied Volatility (IV)	30-Day IV Percentile	90-Day IV Percentile
Pepsi options	18.73%	96%	93%

What does this mean? This means that investors or traders are buying a very significant amount of call and put options contracts as compared to the last 30 and 90 trading days.

	Put IV Skew	Call IV Skew
December Options	Average	Average
January Options	Average	Average

As of today, there is an average demand from call and put buyers or sellers, all neutral over the next two months. To summarize, investors are buying a very significant amount of call and put option contracts and are leaning neutral over the next two months.

On the next page, let’s take a look at the earnings and revenue growth rates and the conclusion.

E = Earnings Are Increasing Quarter-Over-Quarter

Rising stock prices are often strongly correlated with rising earnings and revenue growth rates. Also, the last four quarterly earnings announcement reactions help gauge investor sentiment on Pepsi’s stock. What do the last four quarterly earnings and revenue growth (Y-O-Y) figures for Pepsi look like and more importantly, how did the markets like these numbers?

	2013 Q3	2013 Q2	2013 Q1	2012 Q4
Earnings Growth (Y-O-Y)	1.65%	36.17%	-2.82%	18.81%
Revenue Growth (Y-O-Y)	1.54%	2.12%	1.23%	-1.01%
Earnings Reaction	2.07%	-0.64%	3.04%	1.09%

Pepsi has seen increasing earnings and revenue figures over the last four quarters. From these numbers, the markets have been optimistic about Pepsi’s recent earnings announcements.

P = Excellent Relative Performance Versus Peers and Sector

How has Pepsi stock done relative to its peers, Coca-Cola (NYSE:KO), Dr. Pepper Snapple (NYSE:DPS), Monster Beverage (NASDAQ:MNST), and sector?

	Pepsi	Coca-Cola	Dr.Pepper Snapple	Monster Beverage	Sector
Year-to-Date Return	15.08%	3.82%	3.69%	12.52%	9.77%

Pepsi has been a relative performance leader, year-to-date.

Conclusion

Pepsi provides convenient and affordable beverage and food items to consumers in a multitude of countries around the world. The company has scored a win over chief rival The Coca-Cola Co., taking the soft drink business at the more than 975 U.S. locations of Buffalo Wild Wings Inc. The stock has been moving higher in recent years, but is now pulling back. Over the last four quarters, earnings and revenues have been rising, which has left investors optimistic about earnings announcements. Relative to its peers and sector, Pepsi has been a year-to-date performance leader. Look for Pepsi to OUTPERFORM.