PepsiCo (NYSE: PEP) recently reported its Q2 results, with revenues missing and earnings exceeding our estimates. The company reported revenue of $22.5 billion and adjusted earnings of $2.28 per share, compared to our estimates of $22.8 billion and $2.15, respectively. The company continues to face lower volume, while pricing continued to inch higher in Q2. Although PepsiCo posted a mixed Q2, we think its stock has some room left for growth from its current levels of around $165. In this note, we discuss PepsiCo’s stock performance, key takeaways from its recent results, and valuation.
Firstly, let us look at its stock performance in recent years. PEP stock has witnessed gains of 10% from levels of $150 in early January 2021 to around $165 now, vs. an increase of about 50% for the S&P 500 over this roughly three-year period. However, the increase in PEP stock has been far from consistent. 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, PEP stock looks like it has some room for growth. We estimate PepsiCo’s Valuation to be $185 per share, reflecting over 10% upside from its current levels. 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 figure aligns with the average P/E multiple for PEP over the last four years.
PepsiCo’s revenue of $22.5 billion in Q2 reflects a 2% organic growth driven by a 5% rise in pricing, offsetting a 3% decline in volume. All but the Quaker Foods segment saw organic sales rise in Q2. The U.S. FDA late last year issued a recall of over three dozen Quaker Oats products, citing salmonella contamination concerns. The recall significantly impacted the segment performance in Q1 and Q2. While the Q2 segment sales were down 18% y-o-y, operating profit plunged 34%. However, the company’s consolidated operating profit rose 11% and the core operating margin expanded by 103 bps. The margin expansion led to a 9% y-o-y rise in the bottom line to $2.28 on an adjusted basis.
Looking forward, the company expects its revenue to rise by 4% on an organic basis and at least an 8% rise in adjusted earnings on a constant currency basis. Overall, PepsiCo posted a mixed Q2, with the impact of the Quaker recall weighing on the overall performance. We think that challenging macroeconomic factors and higher pricing for its products may weigh on the overall demand for PepsiCo in the near term. With high inflation, the consumer spending environment isn’t great. Consumers tend to shift to cheaper alternatives or reduce the consumption and continuous pricing growth to drive sales may not be the solution, in our view. The company has explored different options, including smaller and high-margin packages, which have worked in its favor lately.
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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