PepsiCo Earnings: Brand Resonance and Price Mix Management Support Growth; Shares Undervalued

We plan to raise our $176 fair value estimate for PepsiCo PEP by a low-single-digit percentage after absorbing better-than-expected third-quarter results driven by snack and beverage innovations, flexible channel strategy, and efficiency gains. Organic revenue grew 9% and adjusted EPS was up 15%, both outpacing our estimates of 8% and 12%, respectively. We are maintaining our 10% organic sales growth projection for 2023 while tweaking our adjusted EPS growth estimate to 11% from 10% on better margins. Our 10-year projections for mid-single-digit sales growth and high-single-digit EPS expansion remain in place. Shares look undervalued trading at a 6% discount, and we suggest long-term investors consider buying this wide-moat name.

We attribute the top-line growth (against a tough 16% comparison a year ago) to co-ordinated efforts on branding, innovation, and commercialization to assert PepsiCo’s value proposition amid a cautious consumer backdrop and to optimize in-market execution across categories and geographies. Despite an 11% price increase in the quarter and 14% year to date, volume is resilient (down 2.5%), helped by recipe innovations catering to health-conscious consumers, smaller pack sizes for the on-the-go lifestyle, and wider distribution in the convenience and food service channels. Strong pricing, coupled with easing cost inflation and manufacturing automation, buoyed gross margins by 140 basis points to 54.5%, driving the bulk of the 20% operating profit growth for the quarter. We expect pricing to remain the key top-line driver in the coming year, given management’s price mix focus and our view that commodity cost inflation (especially in packaging materials) will likely stay higher than prepandemic levels. Meanwhile, we see a flattish overall volume at best, as secular headwinds in soft drinks and PepsiCo’s proactive pruning of less attractive products such as take-home water are offset by growth in emerging market snack demand.