Here’s Why PepsiCo Stock Is A Better Pick Over Its Sector Peer?

PEP: PepsiCo logo

We think PepsiCo stock (NYSE: PEP) is currently a better pick than Procter & Gamble stock (NYSE: PG) in the consumer defensive sector, given its better prospects and comparatively lower valuation. PEP stock is trading at 2.9x trailing revenues, compared to 4.5x for P&G. We believe this valuation gap will narrow in favor of PepsiCo, given its superior revenue growth, as discussed below.

Looking at stock returns, PEP, with a 1% gain in the last twelve months, has fared better than -5% returns for P&G, and the broader S&P500 index, down 15%. There is more to the comparison, and in the sections below, we discuss why we believe PEP stock will offer better returns over PG in the next three years. We compare a slew of factors, such as historical revenue growth, returns, and valuation, in an interactive dashboard analysis of PepsiCo vs. Procter & GambleWhich 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 4.3% for P&G.
  • 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 P&G’s sales grew at an average rate of 5.8% to $80.2 billion in fiscal 2022 (fiscal ends in June), compared to $67.7 billion in 2019.
  • 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.
  • P&G’s largest segment is Fabric & Home Care, contributing around 35% of the company’s revenues. It has also seen a steady rise in sales over recent years. In fiscal 2022, the company reported a 5% rise in total sales, driven by a 2% growth in unit volume.
  • Our PepsiCo Revenue Comparison and Procter & Gamble 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 P&G’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 1.7% CAGR for P&G, based on Trefis Machine Learning analysis.
  • In fact, P&G guidance indicates a cut in sales between 1% and 3% in fiscal 2023, and earnings likely to remain at fiscal 2022 levels of $5.81, as it braces for a $3.9 billion headwind from forex and higher costs.
  • 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.
Relevant Articles
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2. Procter & Gamble Is More Profitable

  • PepsiCo’s operating margin fell to 14.7% in 2021, compared to 16.1% in 2018. In comparison, P&G’s operating margin rose to 22.7% in fiscal 2022 from 8.8% in fiscal 2019.
  • Our PepsiCo Operating Income Comparison and Procter & Gamble Operating Income Comparison dashboards have more details.
  • Looking at financial risk, PepsiCo’s debt as a percentage of equity of 33.5% is higher than 9.1% for P&G, while its 7.1% cash as a percentage of assets is higher than the 5.8% for the latter, implying that P&G has a better debt position, but PepsiCo has more cash cushion.

3. The Net of It All

  • We see that PepsiCo has demonstrated better revenue growth, has a better cash cushion, and is available at a comparatively lower valuation. On the other hand, P&G is more profitable and has a better debt position. Going by historical data, PEP stock appears to be a better bet among the two.
  • Now, looking at prospects, using P/S as a base, due to high fluctuations in P/E and P/EBIT, we still believe PepsiCo is currently the better choice of the two.
  • The table below summarizes our revenue and return expectations for both companies over the next three years and points to an expected return of 1% for P&G over this period and a 7% expected return for PepsiCo stock, implying that investors will likely be better off buying PEP over PG, based on Trefis Machine Learning analysis – PepsiCo vs. Procter & Gamble – which also provides more details on how we arrive at these numbers.

While PEP may outperform PG in the next three years, 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 Jan 2023
MTD [1]
YTD [1]
Total [2]
PEP Return -3% -3% 68%
PG Return -1% -1% 78%
S&P 500 Return 4% 4% 78%
Trefis Multi-Strategy Portfolio 8% 8% 239%

[1] Month-to-date and year-to-date as of 1/13/2023
[2] Cumulative total returns since the end of 2016

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