Company Reports

Following years of anemic growth due to operational missteps and underinvestments, management has worked to right PepsiCo’s ship, even amid covid-19-related disruptions and input cost inflation. But we think there is more room to go, as the firm benefits from secular tailwinds in the snack business, growth initiatives in select attractive beverage subcategories (such as energy drinks) and various emerging markets (Latin America, Africa, and Asia Pacific), and an integrated business model facilitating more effective commercialization.

We plan to maintain our $176 fair value estimate for wide-moat PepsiCo after absorbing its first-quarter results that matched our estimates. Organic sales were up 3%, led by international growth. EPS rose 6%, benefiting from expense control. Although we expect Quaker product recalls will continue to weigh on US sales in the next few quarters, we view the firm as remaining on track to increase 2024 sales and EPS by 4% and 7%, respectively. Our 10-year forecasts for 5% sales CAGR and 17% average operating margins remain in place, and we view shares as slightly undervalued.

Following years of anemic growth due to operational missteps and underinvestments, management has worked to right PepsiCo’s ship, even amid covid-19-related disruptions and inflation. But we think there is more room to go, as the firm benefits from secular tailwinds in the snack business, growth initiatives in select attractive beverage subcategories (such as energy drinks) and regional markets (Latin America, Africa, and Asia Pacific), and an integrated business model facilitating more effective commercialization.

We plan to trim our $180 fair value estimate for wide-moat PepsiCo by a low-single-digit percentage after absorbing its mixed 2023 results and a cautious 2024 outlook. Sales were up 6%, missing our 8% estimate on Quaker recalls and currency headwinds in the fourth quarter, but adjusted EPS expansion (12%) was head of our assumption (11%) on higher-than-expected productivity savings of $1 billion. For 2024, we now expect a lower growth trajectory as we factor in a normalized price increases of 2%-3% in beverages and snacks, modest volume expansion on product launches and refreshes, and ongoing high investment needs in marketing and innovation to assert Pepsi's value-proposition amid a softening consumer backdrop. Our 10-year forecasts for 5% sales CAGR and 16% average operating margins remain in place, and we view shares as slightly undervalued.

We plan to maintain our $180 fair value estimate and our Exemplary capital allocation rating for wide-moat PepsiCo after the firm announced the appointment of company insider Jamie Caulfield as the new CFO. Hugh Johnston, the former CFO and a 36-year company veteran, is leaving to take the CFO role at wide-moat Disney.

Following years of anemic growth due to operational missteps and underinvestments, management has worked to right PepsiCo’s ship, even amid COVID-19-related disruptions and inflation. But we think there is more room to go, as the firm benefits from secular tailwinds in the snack business, growth initiatives in select attractive beverage subcategories (such as energy drinks) and regional markets (Africa and Asia-Pacific), and an integrated business model facilitating more effective commercialization.

We plan to raise our $176 fair value estimate for PepsiCo 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 plan to raise our fair value estimate for wide-moat PepsiCo by a low-single-digit percentage after digesting better-than-expected second-quarter results driven by snack and beverage innovations, brand investments, and productivity gains. Organic revenue grew 13% and core EPS was up 15%, both edging our estimates (12% and 13%, respectively). The firm revised up 2023 organic revenue and EPS growth guidance to 10% (from 8%) and 12% (from 9%), respectively, which we view as attainable, and we plan to tick up our own 2023 forecast to approximate the updated outlook. Our 10-year projections for mid-single-digit sales growth and high-single-digit EPS expansion remain in place. We see shares trading at a slight premium to our fair value estimate after the planned increase, and suggest investors wait for a better entry point.

Following years of anemic growth due to operational missteps and underinvestment, management has worked to right PepsiCo’s ship, even amid COVID-19-related disruptions and inflation. But we think there is more room to go, as the firm benefits from secular tailwinds in the snack business, growth initiatives in select attractive beverage subcategories (energy drinks, for one) and regional markets (Africa and Asia-Pacific), and an integrated business model facilitating more effective commercialization.

We plan to raise our $170 fair value estimate for wide-moat PepsiCo 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.

Following years of anemic growth due to operational missteps and underinvestment, management has worked to right PepsiCo’s ship, even amid COVID-19-related disruptions and inflation. But we think there is more room to go, as the firm benefits from secular tailwinds in the snack business, growth initiatives in select attractive beverage subcategories (energy drinks, for one) and regional markets (Africa, Asia-Pacific), and an integrated business model facilitating more effective commercialization.

The strong fourth-quarter results from wide-moat PepsiCo reinforced our confidence in the firm’s growth strategies around brand investment, product innovation, and channel expansion. The firm delivered a 15% increase in organic revenue (powered by an 18% snack sale expansion), and 10% growth in adjusted EPS, slightly ahead of our 9% and 5% respective estimates. After incorporating the better-than-expected results, we plan to raise our $170 fair value estimate by a low-single-digit percentage and view the shares as fairly valued.

Concerns abound as it pertains to inflation and the ultimate consumer response, but we continue to believe wide-moats Coca-Cola and PepsiCo are well positioned to navigate the uncertain landscape. Our confidence in their durable competitive advantage stems from stout brand portfolios, which underpin strong pricing power and close retailer relationships, and from scale benefits due to the expansive global footprint each maintains. This pricing power has been evidenced this year as Coke and Pepsi have realized low-double-digit benefits from price/mix amid cost inflation and currency headwinds, but this has not impeded volumes, and we don’t see this ability to unearth gains in pricing and volumes faltering long-term.

Following years of anemic growth due to operational missteps and underinvestment, management has worked to right PepsiCo’s ship, even amid COVID-19-related disruptions and inflation. But we think there is more room to go, as the firm benefits from secular tailwinds in the snack business, growth initiatives in select attractive beverage subcategories (energy drinks, for one) and regional markets (Africa, Asia-Pacific), and an integrated business model facilitating more effective commercialization.

Wide-moat PepsiCo displayed its brand strength in the third quarter, chalking up impressive marks. Organic revenue popped 16% (17% from higher prices and favorable mix, slightly offset by a 0.8% drawdown in volume), while core constant-currency EPS grew 14%. We think the profit gains are quite notable as the company faced mammoth inflationary headwinds, which management thinks will result in a high-teens negative hit in fiscal 2022. We don’t think Pepsi is relying only on pricing for these gains; it also remains committed to unearthing cost savings to offset the cost pressures it is facing.

For many consumers, the Pepsi trademark elicits images of cola containers and ads extolling the brand’s taste superiority versus Coke. While PepsiCo is still a beverage behemoth, its business now extends beyond this industry, with Frito-Lay and Quaker products accounting for over half of sales and over 65% of profits, by our estimate. A diversified portfolio across snacks and beverages is the source of many of the company’s competitive advantages, in our view. Though management missteps have stymied performance in the past, the confluence of better execution and benefits inherent to its integrated business model has allowed Pepsi to reaccelerate profitable growth, and we see plenty of room to run.

We think wide-moat Pepsi’s pricing power combined with the benefits of its scale and diverse portfolio were on display in the second quarter. The firm delivered 13% organic revenue growth, which strikes us as impressive when lapping 12.8% organic revenue growth in the same period a year ago. Further, although pricing was up 12.1%, aggregate volumes ticked up at a low-single-digit rate, evidencing the stout brand intangible assets Pepsi boasts. However, this strength was concentrated in the firm’s international arms, which clocked 7%-14% volume gains, in contrast to nearly no volume gains in its home turf. We attribute this languished unit growth in North American segments to the rash of cost pressures facing consumers at the pump and throughout the grocery store, trends we don’t perceive abating in the near term. However, we posit that Pepsi’s unwavering commitment to invest in research and development as well as marketing (which we model at around 6.5% and 1% of sales by 2026, respectively) should serve to buoy its competitive prowess over time.

For many consumers, the Pepsi trademark elicits images of cola containers and ads extolling the brand’s taste superiority versus Coke. While PepsiCo is still a beverage behemoth, its business now extends beyond this industry, with Frito-Lay and Quaker products accounting for over half of sales and over 65% of profits, by our estimate. A diversified portfolio across snacks and beverages is the source of many of the company’s competitive advantages, in our view. Though management missteps have stymied performance in the past, the confluence of better execution and benefits inherent to its integrated business model has allowed Pepsi to reaccelerate profitable growth, and we see plenty of room to run.

With leading brands and stout cost advantages, we’ve long believed that Coca-Cola (the dominant player in the carbonated soft drink—CSD—space, with nearly 21% value share per Euromonitor) and PepsiCo (the top operator in global savory snacks, with nearly 22% value share, and the second-largest player in the CSD market with 10% share) have carved out wide economic moats. From our vantage point, this edge has manifest in pricing power and negotiating leverage with suppliers, which we think will persist and prove particularly valuable as inflationary headwinds show no signs of diminishing.

We view Pepsi’s strategy, emphasizing growth in its core snacks (number one position) and beverages (number two position) businesses through expanding its addressable market and investing to align its mix with evolving consumer preferences (such as snacking as a meal substitute), favorably.