PepsiCo (NYSE: PEP) recently reported its Q3 results, with revenues and earnings beating our estimates. The company reported revenue of $23.5 billion, up 7% y-o-y and above our $23.0 billion estimate. Its adjusted earnings of $2.25 per share were up 14% y-o-y and above our estimated $2.18 per share. In this note, we discuss PepsiCo’s stock performance, key takeaways from its recent results, and valuation.
PEP stock has seen little change, moving slightly from levels of $150 in early January 2021 to around $160 now, vs. an increase of about 15% for the S&P 500 over this roughly 3-year period. Overall, the performance of PEP stock with respect to the index has been lackluster. Returns for the stock were 17% in 2021, 4% in 2022, and -11% in 2023 (YTD). In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 13% in 2023 (YTD) – indicating an underperformance for the ticker in 2021 and 2023.
In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Consumer Staples sector, including WMT, PG, and COST, and even for the megacap stars GOOG, TSLA, and MSFT. In contrast, the Trefis High Quality (HQ) Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index, less of a roller-coaster ride, as evident in HQ Portfolio performance metrics.
Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could PEP face a similar situation as it did in 2021 and 2023 and lose value over the next 12 months – or will it see a strong jump? From a valuation perspective, PEP stock looks attractive and will likely see higher levels over time. We estimate PepsiCo’s Valuation to be $194 per share, reflecting a 20% upside from its current levels of $160. Our forecast is based on a 26x P/E multiple for PEP and expected earnings of $7.55 on a per-share and adjusted basis for the full year 2023. This compares with the last five-year average of 24x. The company raised its earnings outlook to now be around $7.54 (vs. $7.47 earlier).
PepsiCo’s revenue of $23.5 billion reflects a 9% organic growth driven by an 11% rise in pricing, offsetting a 2.5% decline in volume. The company saw its adjusted operating margin improve 82 bps to 17.2% from 16.4% in the prior year quarter. This can be attributed to lower SG&A expenses as a percentage of revenue. Also, consumers have been moving toward smaller packs due to cost and health concerns. PepsiCo has benefited from its small packs with a better pricing strategy.
Higher revenues and margin expansion led to a 14% y-o-y rise in the bottom line to $2.25 on a per-share and adjusted basis. Looking forward, challenging macroeconomic factors and a weak consumer spending environment could weigh on PepsiCo’s near-term performance. Still, the company’s raised outlook implies continued optimism in the business, and we believe investors will likely be better off picking PEP at current levels of around $160 for robust gains in the long run.
|S&P 500 Return||1%||13%||93%|
|Trefis Reinforced Value Portfolio||0%||23%||531%|
 Month-to-date and year-to-date as of 10/16/2023
 Cumulative total returns since the end of 2016