PepsiCo Earnings: Innovation and Productivity Initiatives to Power Profit Growth; Shares No Bargain

We plan to raise our $170 fair value estimate for wide-moat PepsiCo PEP by a low-single-digit percentage after absorbing better-than expected first-quarter results driven by snack and beverage innovations and strong in-market execution. Organic revenue grew 14% with strength across major geographical markets, and adjusted EPS (excluding one-time gain from juice assets divestiture in early 2022) rose 18%, both ahead of our estimates (10% and 12%, respectively). In light of the strong performance, we are ticking up our 2023 revenue growth forecast to 6.5% (from 4.8%) and adjust EPS growth to 9% (from 8.4%), though our 10-year projections for mid-single-digit top-line growth and high-single-digit EPS expansion remain unchanged. We see shares trading at a premium to our fair value estimate after the planned increase, and suggest investors wait for a better entry point.

Despite midteens price increases across snacks and beverages, we attributed resilient volume (down 2% due in part to temporary Gatorade inventory reduction amid a distribution strategy shift) to the strength of PepsiCo’s brand portfolio, which is underpinned by constant innovation and point-of-sale execution. Notable innovations in the snack sphere included bite-size chip snacks in easy-to-pour canisters and chili and garlic flavored versions of classic Cheetos, Doritos and Tostitos chips that added to flavor varieties and snacking occasions. Meanwhile, no-sugar sparkling soft drinks and alcoholic beverages (including Hard Mountain Dew and Lipton Hard Iced Tea) remained research and commercialization priorities, which we believe can help reinforce the firm’s competitive standing in the beverage aisle. Management expects little further price hikes in the coming quarters, which we view as a prudent decision to protect the firm’s value proposition, now that consumers have become increasingly cautious about their grocery spending amid macroeconomic headwinds.