PepsiCo (NYSE: PEP) will report its Q2 2024 results on Thursday, July 11. We expect the company’s revenues to come in at $22.8 billion and earnings at $2.15 on a per share and adjusted basis, broadly aligning with the consensus estimates of $22.7 billion and $2.16, respectively. PepsiCo likely continued to benefit from better pricing initiatives, especially for its smaller size variants. Not only do we think that the company will navigate well in Q2, we believe its stock has some room left for growth. So, what are some of the trends that are likely to drive PepsiCo’s results?

Firstly, let us look at PEP stock performance in recent years. PEP stock has witnessed marginal gains from levels of $150 in early January 2021 to around $160 now, vs. an increase of about 45% for the S&P 500 over this roughly three-year period. Overall, the performance of PEP stock with respect to the index has been quite volatile. Returns for the stock were 17% in 2021, 4% in 2022, and -6% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 24% in 2023 — indicating that PEP underperformed the S&P 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 underperform the S&P over the next 12 months — or will it see a strong jump? From a valuation perspective, we think PEP stock has some room for growth. We estimate PepsiCo’s Valuation to be $186 per share, reflecting a 13% upside from its current level of around $162. Our forecast is based on a 23x P/E multiple for PEP and expected earnings of $8.15 on a per-share and adjusted basis for the full year 2024. The 23x P/E multiple aligns with the average value over the last four years.

Looking at the previous quarter, PepsiCo’s revenue of $18.25 billion reflected a 3% organic growth driven by a 5% rise in pricing, offsetting a 2% decline in volume. All but the Quaker Foods segment saw sales rise in Q1. The U.S. FDA issued a recall of over three dozen Quaker Oats products, citing salmonella contamination concerns. The recall significantly impacted the segment performance in Q1. While the segment sales were down 24% y-o-y, operating profit plunged 126%. However, the company’s consolidated operating profit rose 3% and the operating margin expanded by 20 bps. Higher revenues and margin expansion led to a 7% y-o-y rise in the bottom line to $1.61 on an adjusted basis.

Coming to the latest quarter, the company should benefit from better pricing trends. However, a weak consumer spending environment may weigh on the company’s overall performance. Furthermore, the Quaker Foods segment may continue to face headwinds from its product recall. We don’t expect any meaningful growth in the company’s revenue or earnings. Although PepsiCo has guided for at least 4% sales growth on an organic basis in 2024, it may be challenging to achieve it, given the overall decline in volumes.

While PEP stock looks like it has some room for growth, it is helpful to see how PepsiCo Peers fare on metrics that matter. You will find other valuable comparisons for companies across industries at Peer Comparisons.

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