⁠Dimitry Nakhla | Babylon Capital®
2 months ago I shared my “sober valuation analysis 🧘🏽‍♂️” on $PEP explaining why it’s a quality business trading at an attractive valuation

Since then, $PEP shares rose +11% 📈

Of course for the long-term investor what happens month-to-month or year-to-year is irrelevant — yet, a +11% increase on a low-risk consumer staple like $PEP is notable as it reinforces & highlights the importance of the fundamental analysis shared just a couple months ago

As I stated:

“Today at $165💵 $PEP appears to be a worthwhile investment, *especially for* investors who are seeking an investment in a recession proof, low volatility, & >3% dividend yield stock

I view consumer staples as a nice bond proxy / a “bond alternative” in a portfolio that pays an increasing income with some price appreciation (assuming they are purchased at an attractive valuation, limiting downside potential)”

#stocks #investing
_______

𝐃𝐈𝐒𝐂𝐋𝐎𝐒𝐔𝐑𝐄‼️: 𝐓𝐡𝐢𝐬 𝐢𝐬 𝐍𝐎𝐓 𝐈𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭 𝐀𝐝𝐯𝐢𝐜𝐞. 𝐁𝐚𝐛𝐲𝐥𝐨𝐧 𝐂𝐚𝐩𝐢𝐭𝐚𝐥® 𝐚𝐧𝐝 𝐢𝐭𝐬 𝐫𝐞𝐩𝐫𝐞𝐬𝐞𝐧𝐭𝐚𝐭𝐢𝐯𝐞𝐬 𝐦𝐚𝐲 𝐡𝐚𝐯𝐞 𝐩𝐨𝐬𝐢𝐭𝐢𝐨𝐧𝐬 𝐢𝐧 𝐭𝐡𝐞 𝐬𝐞𝐜𝐮𝐫𝐢𝐭𝐢𝐞𝐬 𝐝𝐢𝐬𝐜𝐮𝐬𝐬𝐞𝐝 𝐢𝐧 𝐭𝐡𝐢𝐬 𝐭𝐰𝐞𝐞𝐭.

𝐓𝐡𝐞 𝐢𝐧𝐟𝐨𝐫𝐦𝐚𝐭𝐢𝐨𝐧 𝐜𝐨𝐧𝐭𝐚𝐢𝐧𝐞𝐝 𝐢𝐧 𝐭𝐡𝐢𝐬 𝐭𝐰𝐞𝐞𝐭 𝐢𝐬 𝐢𝐧𝐭𝐞𝐧𝐝𝐞𝐝 𝐟𝐨𝐫 𝐢𝐧𝐟𝐨𝐫𝐦𝐚𝐭𝐢𝐨𝐧𝐚𝐥 𝐩𝐮𝐫𝐩𝐨𝐬𝐞𝐬 𝐨𝐧𝐥𝐲 𝐚𝐧𝐝 𝐬𝐡𝐨𝐮𝐥𝐝 𝐧𝐨𝐭 𝐛𝐞 𝐜𝐨𝐧𝐬𝐭𝐫𝐮𝐞𝐝 𝐚𝐬 𝐢𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭 𝐚𝐝𝐯𝐢𝐜𝐞 𝐭𝐨 𝐦𝐞𝐞𝐭 𝐭𝐡𝐞 𝐬𝐩𝐞𝐜𝐢𝐟𝐢𝐜 𝐧𝐞𝐞𝐝𝐬 𝐨𝐟 𝐚𝐧𝐲 𝐢𝐧𝐝𝐢𝐯𝐢𝐝𝐮𝐚𝐥 𝐨𝐫 𝐬𝐢𝐭𝐮𝐚𝐭𝐢𝐨𝐧. 𝐏𝐚𝐬𝐭 𝐩𝐞𝐫𝐟𝐨𝐫𝐦𝐚𝐧𝐜𝐞 𝐢𝐬 𝐧𝐨 𝐠𝐮𝐚𝐫𝐚𝐧𝐭𝐞𝐞 𝐨𝐟 𝐟𝐮𝐭𝐮𝐫𝐞 𝐫𝐞𝐬𝐮𝐥𝐭𝐬.

𝐈𝐧𝐟𝐨𝐫𝐦𝐚𝐭𝐢𝐨𝐧 𝐜𝐨𝐧𝐭𝐚𝐢𝐧𝐞𝐝 𝐢𝐧 𝐭𝐡𝐢𝐬 𝐭𝐰𝐞𝐞𝐭 𝐡𝐚𝐬 𝐛𝐞𝐞𝐧 𝐨𝐛𝐭𝐚𝐢𝐧𝐞𝐝 𝐟𝐫𝐨𝐦 𝐬𝐨𝐮𝐫𝐜𝐞𝐬 𝐛𝐞𝐥𝐢𝐞𝐯𝐞𝐝 𝐭𝐨 𝐛𝐞 𝐫𝐞𝐥𝐢𝐚𝐛𝐥𝐞, 𝐛𝐮𝐭 𝐢𝐬 𝐧𝐨𝐭 𝐠𝐮𝐚𝐫𝐚𝐧𝐭𝐞𝐞𝐝 𝐚𝐬 𝐭𝐨 𝐜𝐨𝐦𝐩𝐥𝐞𝐭𝐞𝐧𝐞𝐬𝐬 𝐨𝐫 𝐚𝐜𝐜𝐮𝐫𝐚𝐜𝐲."

A sober valuation analysis on $PEP 🧘🏽‍♂️

•NTM P/E Ratio: 20.18x
•10-Year Mean: 22.11x

•NTM FCF Yield: 4.15%
•10-Year Mean: 4.15%

As you can see, $PEP appears to be trading near fair value

Going forward, investors can expect to receive ~10% MORE in earnings per share & the same in FCF per share🧠***

Before we get into valuation, let’s take a look at why $PEP is a quality business

BALANCE SHEET✅
•Cash & Equivalents: $10.00B
•Long-Term Debt: $37.60B

$PEP has a good balance sheet, an A+ S&P Credit Rating & 15.65x FFO Interest Coverage Ratio

RETURN ON CAPITAL✅
•2018: 20.6%
•2019: 20.4%
•2020: 17.2%
•2021: 18.7%
•2022: 19.5%
•2023: 19.5%

RETURN ON EQUITY✅
•2018: 98.2%
•2019: 49.9%
•2020: 50.5%
•2021: 51.7%
•2022: 53.7%
•2023: 51.0%

$PEP has solid return metrics, highlighting the financial efficiency of the business

REVENUES🆗
•2013: $66.42B
•2023: $91.47B
•CAGR: 3.25%

FREE CASH FLOW❌
•2013: $6.89B
•2023: $7.92B
•CAGR: 1.40%

NORMALIZED EPS✅
•2013: $4.37
•2023: $7.62
•CAGR: 5.71%

SHARE BUYBACKS✅
•2013 Shares Outstanding: 1.56B
•LTM Shares Outstanding: 1.38B

By reducing its shares outstanding ~11.5%, $PEP increased its EPS by ~13.0% (assuming 0 growth)

MARGINS✅
•LTM Gross Margins: 54.2%
•LTM Operating Margins: 14.8%
•LTM Net Income Margins: 9.9%

PAID DIVIDENDS✅
•2013: $2.24
•2023: $4.95
•CAGR: 8.25%

***NOW TO VALUATION 🧠

As stated above, investors can expect to receive ~10 MORE in EPS & the same in FCF per share

Using Benjamin Graham’s 2G rule of thumb, $PEP has to grow earnings at a 10.09% CAGR over the next several years to justify its valuation

Today, analysts anticipate 2024 - 2026 EPS growth over the next few years to be less than the (10.09%) required growth rate:

2024E: $8.16 (7.1% YoY) *FY Dec
2025E: $8.82 (8.0% YoY)
2026E: $9.44 (7.0% YoY)

$PEP [...]

has an excellent track record of meeting analyst estimates ~2 years out, so let’s assume $PEP ends 2026 with $9.44 in EPS & see its CAGR potential assuming different multiples

22x P/E: $207.68💵 … ~11.5% CAGR

21x P/E: $198.24💵 … ~9.7% CAGR

20x P/E: $188.80💵 … ~7.9% CAGR

As you can see, $PEP has decent return potential at 21x earnings & strong return potential at 22x earnings

Even assuming a 20x multiple, $PEP could compound at ~8% which isn’t too bad when we consider how low-risk $PEP is

Today at $165💵 $PEP appears to be a worthwhile investment, *especially for* investors who are seeking an investment in a recession proof, low volatility, & >3% dividend yield stock

I view consumer staples as a nice bond proxy / a “bond alternative” in a portfolio that pays an increasing income with some price appreciation (assuming they are purchased at an attractive valuation, limiting downside potential)

#stocks #investing
___

𝐃𝐈𝐒𝐂𝐋𝐎𝐒𝐔𝐑𝐄‼️: 𝐓𝐡𝐢𝐬 𝐢𝐬 𝐍𝐎𝐓 𝐈𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭 𝐀𝐝𝐯𝐢𝐜𝐞. 𝐁𝐚𝐛𝐲𝐥𝐨𝐧 𝐂𝐚𝐩𝐢𝐭𝐚𝐥® 𝐚𝐧𝐝 𝐢𝐭𝐬 𝐫𝐞𝐩𝐫𝐞𝐬𝐞𝐧𝐭𝐚𝐭𝐢𝐯𝐞𝐬 𝐦𝐚𝐲 𝐡𝐚𝐯𝐞 𝐩𝐨𝐬𝐢𝐭𝐢𝐨𝐧𝐬 𝐢𝐧 𝐭𝐡𝐞 𝐬𝐞𝐜𝐮𝐫𝐢𝐭𝐢𝐞𝐬 𝐝𝐢𝐬𝐜𝐮𝐬𝐬𝐞𝐝 𝐢𝐧 𝐭𝐡𝐢𝐬 𝐭𝐰𝐞𝐞𝐭.

𝐓𝐡𝐞 𝐢𝐧𝐟𝐨𝐫𝐦𝐚𝐭𝐢𝐨𝐧 𝐜𝐨𝐧𝐭𝐚𝐢𝐧𝐞𝐝 𝐢𝐧 𝐭𝐡𝐢𝐬 𝐭𝐰𝐞𝐞𝐭 𝐢𝐬 𝐢𝐧𝐭𝐞𝐧𝐝𝐞𝐝 𝐟𝐨𝐫 𝐢𝐧𝐟𝐨𝐫𝐦𝐚𝐭𝐢𝐨𝐧𝐚𝐥 𝐩𝐮𝐫𝐩𝐨𝐬𝐞𝐬 𝐨𝐧𝐥𝐲 𝐚𝐧𝐝 𝐬𝐡𝐨𝐮𝐥𝐝 𝐧𝐨𝐭 𝐛𝐞 𝐜𝐨𝐧𝐬𝐭𝐫𝐮𝐞𝐝 𝐚𝐬 𝐢𝐧𝐯𝐞𝐬𝐭𝐦𝐞𝐧𝐭 𝐚𝐝𝐯𝐢𝐜𝐞 𝐭𝐨 𝐦𝐞𝐞𝐭 𝐭𝐡𝐞 𝐬𝐩𝐞𝐜𝐢𝐟𝐢𝐜 𝐧𝐞𝐞𝐝𝐬 𝐨𝐟 𝐚𝐧𝐲 𝐢𝐧𝐝𝐢𝐯𝐢𝐝𝐮𝐚𝐥 𝐨𝐫 𝐬𝐢𝐭𝐮𝐚𝐭𝐢𝐨𝐧. 𝐏𝐚𝐬𝐭 𝐩𝐞𝐫𝐟𝐨𝐫𝐦𝐚𝐧𝐜𝐞 𝐢𝐬 𝐧𝐨 𝐠𝐮𝐚𝐫𝐚𝐧𝐭𝐞𝐞 𝐨𝐟 𝐟𝐮𝐭𝐮𝐫𝐞 𝐫𝐞𝐬𝐮𝐥𝐭𝐬.

𝐈𝐧𝐟𝐨𝐫𝐦𝐚𝐭𝐢𝐨𝐧 𝐜𝐨𝐧𝐭𝐚𝐢𝐧𝐞𝐝 𝐢𝐧 𝐭𝐡𝐢𝐬 𝐭𝐰𝐞𝐞𝐭 𝐡𝐚𝐬 𝐛𝐞𝐞𝐧 𝐨𝐛𝐭𝐚𝐢𝐧𝐞𝐝 𝐟𝐫𝐨𝐦 𝐬𝐨𝐮𝐫𝐜𝐞𝐬 𝐛𝐞𝐥𝐢𝐞𝐯𝐞𝐝 𝐭𝐨 𝐛𝐞 𝐫𝐞𝐥𝐢𝐚𝐛𝐥𝐞, 𝐛𝐮𝐭 𝐢𝐬 𝐧𝐨𝐭 𝐠𝐮𝐚𝐫𝐚𝐧𝐭𝐞𝐞𝐝 𝐚𝐬 𝐭𝐨 𝐜𝐨𝐦𝐩𝐥𝐞𝐭𝐞𝐧𝐞𝐬𝐬 𝐨𝐫 𝐚𝐜𝐜𝐮𝐫𝐚𝐜𝐲. "- Dimitry Nakhla | Babylon Capital®
tweet

⁠ Q-Cap 
RT @phoenixvalue: This is delusional even by industry standards https://t.co/5BZMEi5Oct
tweet

⁠The Long Investor
RT @CristiSerban13: @TheLongInvest one of your best call ever, if not the best! hands down TLI, you deserve a lot of thanks helping people make money of their hard worked money! god bless you and ur family
tweet

⁠Brandon Beylo
I have the best friends on FinTwit.

Thank you @wmthomson22 for this awesome book.

Can’t wait to read it to my daughter.

Every child should know where their critical minerals come from. https://t.co/f8i9xKDFfV
tweet

⁠Clark Square Capital
Just published a new write-up on a very compelling opportunity.

Check it out at the usual place. https://t.co/7Xcl6qrJv7
tweet

AkhenOsiris
I don't see many "all the Chinese numbers (earnings, macro) are fake" posts recently. Fintwit and hedgies all-in on China, maybe a correlation.
tweet

AkhenOsiris
$AMD $MSFT

Microsoft will launch its custom Cobalt 100 chips to customers as a public preview at its Build conference next week, TechCrunch has learned.

In an analyst briefing ahead of Build, Scott Guthrie, Microsoft’s executive VP of the Microsoft Cloud and AI group, directly compared Cobalt to AWS’s Graviton chips, which have been available to developers for quite a few years now. Guthrie said that Microsoft’s chips will offer 40% better performance over other ARM chips in the market. Adobe, Snowflake and others have already started using the new chips.

Microsoft first announced its Cobalt chips last November. These 64-bit chips are based on the Arm architecture and feature 128 cores.

In addition to the Cobalt chips, Microsft will also make AMD’s MI300X accelerators available to Azure clients next week. Despite being a major GPU manufacturer, AMD has long trailed Nvidia in the AI space, but as the large cloud providers look to find alternatives to Nvidia’s expensive chips — and as AMD has started to gain some ground in this space by offering better software support — these new chips are now a hot commodity as well.

Guthrie described it as the “most cost-effective GPU out there right now for Azure OpenAI.”
tweet

AkhenOsiris
$SNOW $MSFT

TechCrunch: Microsoft will announce a partnership with Snowflake. Fabric will now support Snowflake’s Iceberg format (in addition to Databrick’s Parquet), which will enable “seamless interoperability with Snowflake and enable any data that’s in Snowflake to show up in Fabric and vice versa.”
tweet

AkhenOsiris
BlackRock's Rick Rieder: Equities can still go 10-15% higher rest of this year.

Rieder impressed by market technicals, margins, buybacks, and moderating but resilient consumer.
tweet

AkhenOsiris
$RDDT

In one fell swoop, OpenAI has addressed the future of porn 🔥

We’re partnering with Reddit to bring its content to ChatGPT and new products: openai.com/index/openai-and-… - OpenAI
tweet

AkhenOsiris
$CFLT Initiated Buy at Oppenheimer
tweet

AkhenOsiris
RT @qcapital2020: $TTWO just announced officially that GTA6 will launch in the fall of 2025

It's not about guidance, it's not about EBITDA.

When this game is released next year in this new YT, TikTok, Discord, Reddit world where Youtubers are more popular than politicians and athletes, I believe a major re-rating will happen.
tweet