PepsiCo
PEP
(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. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 13% in 2023 – 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 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.
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