Is There A Better Pick Over PepsiCo Stock?

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We think that PepsiCo stock (NYSE: PEP) and Colgate-Palmolive stock (NYSE: CL) in the consumer defensive sector will likely give similar returns over the next three years. Colgate-Palmolive is trading at a marginally higher valuation of 3.6x trailing revenues, compared to 3.1x for PepsiCo. Looking at stock returns, PEP, with 7% returns this year, has fared better than CL stock, down 9%, and the broader S&P500 index, down 14%. There is more to the comparison, and in the sections below, we discuss why we believe both stocks are best avoided for now. We compare a slew of factors, such as historical revenue growth, returns, and valuation, in an interactive dashboard analysis of PepsiCo vs. Colgate-PalmoliveWhich Stock Is A Better Bet? Parts of the analysis are summarized below.

1. PepsiCo’s Revenue Growth Is Better

  • Both companies posted sales growth over the last twelve months. Still, PepsiCo’s revenue growth of 9.1% is better than 2.3% for Colgate-Palmolive.
  • Even if we look at a longer time frame, PepsiCo fares better. Its sales grew at an average growth rate of 7.2% to $79.5 billion in 2021, compared to $64.7 billion in 2018, while Colgate-Palmolive saw its sales rise at an average rate of 3.9% to $17.4 billion in 2021, vs. $15.5 billion in 2018.
  • Strong pricing trends have led PepsiCo’s revenue growth over the recent quarters.
  • After Covid-19 induced lockdowns, the recovery has been swift for the beverage giant, with more people venturing out to attend events, travel, and dine.
  • Looking forward, a challenging macroeconomic environment and a strengthening dollar will likely weigh on the company’s top-line growth rate in the near term.
  • Colgate-Palmolive is a leading manufacturer and distributor of household, health care, personal care, and veterinary products, operating in global markets. It derives around 45% of its revenue from oral care products.
  • It has also seen its sales rise based on pricing growth, partly offset by volume decline and forex headwinds so far this year. This trend is expected to continue in the near term, with the dollar strengthening and a challenging macroeconomic environment.
  • Our PepsiCo Revenue Comparison and Colgate-Palmolive Revenue Comparison dashboards provide more insight into the companies’ sales.
  • Looking forward, PepsiCo’s revenue growth over the next three years is expected to be marginally better than Colgate-Palmolive’s. The table below summarizes our revenue expectations for the two companies over the next three years. It points to a CAGR of 2.8% for PepsiCo, compared to a 1.6% CAGR for Colgate-Palmolive, based on Trefis Machine Learning analysis.
  • Note that we have different methodologies for companies that are negatively impacted by Covid and those that are not impacted or positively impacted by Covid while forecasting future revenues. For companies negatively affected by Covid, we consider the quarterly revenue recovery trajectory to forecast recovery to the pre-Covid revenue run rate. Beyond the recovery point, we apply the average annual growth observed in the three years before Covid to simulate a return to normal conditions. For companies registering positive revenue growth during Covid, we consider yearly average growth before Covid with a certain weight to growth during Covid and the last twelve months.

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2. Colgate-Palmolive Is More Profitable, And It Has A Better Debt Position

  • PepsiCo’s operating margin fell to 14.7% in 2021, compared to 16.1% in 2018. In comparison, Colgate-Palmolive’s operating margin fell to 17.7% from 22.3% over this period.
  • Our PepsiCo Operating Income Comparison and Colgate-Palmolive Operating Income Comparison dashboards have more details.
  • Looking at financial risk, PepsiCo’s debt as a percentage of equity of 15.3% is higher than 12.7% for Colgate-Palmolive, while its 6.8% cash as a percentage of assets is higher than the 5.8% for the latter, implying that Colgate-Palmolive has a better debt position and PepsiCo has more cash cushion.

3. The Net of It All

  • We see that PepsiCo has demonstrated better revenue growth and has more cash cushion. On the other hand, Colgate-Palmolive is more profitable, and it has a better debt position.
  • However, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we believe none of the two are great buying opportunities currently, given the challenging macroeconomic outlook and forex headwinds.
  • The table below summarizes our revenue and return expectations for PepsiCo and Colgate-Palmolive over the next three years and points to an expected return of 3% for PepsiCo over this period vs. a 6% expected return for Colgate-Palmolive stock, implying that investors are better off avoiding both of these names in the consumer defensive sector, based on Trefis Machine Learning analysis – PepsiCo vs. Colgate-Palmolive – which also provides more details on how we arrive at these numbers.

While PEP and CL stocks will likely offer similar returns, it is helpful to see how PepsiCo’s Peers 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 at how counter-intuitive the stock valuation is for Target vs. Amerco.

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 Dec 2022
MTD [1]
2022
YTD [1]
2017-22
Total [2]
PEP Return 0% 7% 77%
CL Return 0% -9% 18%
S&P 500 Return 0% -14% 82%
Trefis Multi-Strategy Portfolio 6% -17% 227%

[1] Month-to-date and year-to-date as of 12/1/2022
[2] Cumulative total returns since the end of 2016

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