Is There Any Room For Growth In PepsiCo Stock?

PEP: PepsiCo logo

PepsiCo stock (NYSE: PEP) reported its Q2 results earlier this week, with revenue and earnings comfortably above the street estimates. Despite upbeat results, we believe PEP stock is fairly valued at its current levels, with only a little room for growth, as discussed below.

The company reported revenue of $20.2 billion (up 5% y-o-y) and EPS of $1.86 (up 10% y-o-y) in Q2, compared to the $19.5 billion and $1.74 consensus estimates, respectively. The company benefited from strong sales of its snacks and packaged foods. PepsiCo saw a double-digit pricing growth after its pricing actions to offset rising operating costs. Its adjusted operating margins were up 36 bps in Q2.

Based on solid results, the company raised its full-year outlook, with PepsiCo revenue now expected to rise 10% (organic growth vs. 8% prior forecast) and EPS to grow 8% on a constant currency basis. PEP stock has outperformed its peers and the broader markets with its 8% rise in a month, compared to a 4% rise for Coca-Cola stock (NYSE: KO) and Keurig Dr Pepper stock (NYSE: KDP) and 0% returns for the S&P500 index.

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Looking forward, there are near-term headwinds that may impact the earnings growth for PepsiCo. The U.S. economy could be headed into a recession as the Federal Reserve will likely continue to hike interest rates aggressively to tame surging inflation. The central bank hiked rates by 1.25% over the last two months. There is a possibility of another rate hike this month. Consumer confidence is also declining as surging energy, food, and housing prices eat into household budgets. The markets are already pricing in some economic pain, with the S&P500 correcting by about 20% YTD. However, given that soft drinks and snacks are small-ticket purchases, the impact of the recession may not be profound on PepsiCo.

Following the company’s recently announced Q2 results and keeping in view the macroeconomic developments, we have revised PepsiCo’s Valuation to be around $183 per share (vs. $175 earlier), which is only 7% above the current market price of $170, implying that PEP stock is fairly valued at its current levels. This represents a P/E multiple of 27x for the company based on our EPS forecast of $6.72 for PepsiCo in 2022, slightly higher than the last three-year average of 25x.

While PEP stock looks fairly valued it is helpful to see how PepsiCo’sPeers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

Furthermore, the Covid-19 crisis has created many pricing discontinuities which can offer attractive trading opportunities. For example, you’ll be surprised how counter-intuitive the stock valuation is for Coca-Cola vs. Footlocker.

With inflation rising and the Fed raising interest rates, PepsiCo stock has seen a fall of 1% this year. Can it drop further? See how low PepsiCo stock can go by comparing its decline in previous market crashes. Here is a performance summary of all stocks in previous market crashes.

What if you’re looking for a more balanced portfolio instead? Our high-quality portfolio and multi-strategy portfolio have beaten the market consistently since the end of 2016.

Returns Jul 2022
MTD [1]
YTD [1]
Total [2]
 PEP Return 3% -2% 63%
 S&P 500 Return 1% -20% 71%
 Trefis Multi-Strategy Portfolio 1% -23% 208%

[1] Month-to-date and year-to-date as of 7/15/2022
[2] Cumulative total returns since the end of 2016

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