What’s Next For PepsiCo Stock After A Q1 Beat?

PepsiCo (NYSE: PEP) recently reported its Q1 results, with revenues and earnings exceeding our estimates. The company reported revenue of $18.3 billion and adjusted earnings of $1.61 per share, compared to our estimates of $18.2 billion and $1.55, respectively. The company continues to face lower volume, while pricing inched higher. Although PepsiCo posted an upbeat Q1, we think its stock is appropriately priced at current levels of around $180. 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 15% from levels of $150 in early January 2021 to around $175 now, vs. an increase of about 35% 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 (HQ) 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 is appropriately priced. We estimate PepsiCo’s Valuation to be $186 per share, close to its current price of $178. 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 $18.25 billion reflects 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.

Looking forward, the company expects its revenue to rise by at least 4% on an organic basis and at least an 8% rise in adjusted earnings on a constant currency basis. Overall, PepsiCo posted a solid Q1.  However, the impact of the Quaker recall weighed 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. 

[1] Returns as of 4/25/2024
[2] Cumulative total returns since the end of 2016

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