How PepsiCo’s Stock Grew 40%, More Than 6 Times Its Revenue Growth

by Trefis Team
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As companies become larger, revenue growth slows down as there are fewer number of avenues to expand. Yet, they often are good investments, as PepsiCo (NYSE:PEP) has proven. Between 2016 and 2019, the company saw its stock jump nearly 43% despite a modest 7% revenue growth. What really changed? For starters, Pepsico managed to improve its already thin margins slightly and bought back shares. This, coupled with modest revenue growth, led to a healthy 20% increase in EPS (earnings per share). However, an equally important factor was a 20% expansion in its P/E ratio. Why did the P/E expand? Simply because PepsiCo has shown the ability to craft steady growth by pulling every lever it has. Our dashboard Why PepsiCo stock is up 42.8% between 2016 and 2019 even though revenue increased only 6.9% ? summarizes key factors driving PepsiCo’s stock in the last 3 years. 

PepsiCo Stitched Together Multiple Pieces To Get To 20% EPS Expansion

Unlike McDonald’s case, another company involved in food and beverages, there was no one big change for PepsiCo. It crafted EPS growth from multiple angles. PepsiCo’s EPS increased 19.1% between 2016 to 2019. While revenue increased 6.9%, net income margin was up by 8.1% and share count declined slightly. Revenue growth was primarily driven by continued growth internationally, as well as Frito Lay North America. This is more than making up for the stagnancy in its beverage business in the North American continent.

On the profitability front, net margin expanded from nearly 10% to almost 11%. While this seems like a small move, it is still meaningful in context of EPS increase, especially considering that the food and beverage industry operates on thin margins which makes efficiency gains difficult.

Investors Rewarded This & More

We believe that P/E expansion has, in part, resulted from investors putting faith in PespsiCo’s ability to grow EPS amid headwinds. What used to be its core business – carbonated beverages – is now facing a decline. However, the company has done well in terms of diversifying to snacks and healthier drinks, and this has become more visible in recent years. PepsiCo’s ability to sell its products is all about getting the shelf space in stores. Investors have welcomed the fact that its increased marketing spend is paying off in the form of better consumer brand recall and more shelf space from retailers.

Even though revenue growth has been quite modest, there is a steady upward trend. This outlines PepsiCo’s ability to keep moving ahead in a competitive and mature industry. Combine this with its strong dividend history, and you’ve got yourself a company that can give you steady returns. Interestingly, Covid-19 pandemic impact on PepsiCo could be mixed. More people are stocking up snacks amid the pandemic, which will help PepsiCo’s growing segment. On the other hand, beverage business could suffer as retail channels become less accessible.

The last few years have been full of companies showing surprise market returns even when when their topline didn’t seem to indicate so. Find out How McDonald’s managed 75% stock price growth in 3 years despite significant revenue drop.  Hint: the company made one drastic change.

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