Pepsi Stock Too Cold?

PepsiCo (NASDAQ:PEP) stock has been treading water of late, trading roughly flat over the last year, while returning just about 33% over the last five years, compared to the S&P 500 which has roughly doubled over the same period. However, it may be time to look elsewhere. As of this moment, we find two other consumer staples majors, namely tobacco major Philip Morris International (NYSE:PM), and Dr Pepper and Snapple maker, Keurig Dr Pepper (NASDAQ:KDP) to be more attractive bets compared to PEP stock.

Why? Simply because the valuation and growth numbers tell us so. Phillip Morris and Keurig Dr Pepper both have higher revenue growth and operating margin improvement compared to PepsiCo in the last 12 months, and they are both cheaper than PepsiCo!

In fact, the strategy of thoughtfully shifting allocation to more attractive stocks is part of our market outperforming Trefis High Quality Portfolio (HQ) – which beat the S&P 500 in 2023 handily despite being meaningfully underweight the magnificent 7.  Full HQ performance story here.

Better Buys Than PEP – PM & KDP

Specifically, to illustrate the opportunity for Phillip Morris, you pay $13.76 per dollar of earnings-before-interest-and taxes (EBIT) for PM stock versus $17.85 for PEP, and get higher annual growth (9.9% vs 2.1%), higher quarterly growth (5.6% vs 0.8%), and more margin increase (3.1% vs 1.2%). Overall, you get higher revenue, and operating profit growth from Phillip Morris and Keurig Dr Pepper, and pay less than PepsiCo stock. 

So What’s The Catch?

Now, could PepsiCo buck the trend? Could it grow profits faster than Phillip Morris or Keurig Dr Pepper in the coming quarters? Yes, it is possible, especially given Pepsi’s recent price increases and stronger-than-expected earnings. While the company has been facing lower volumes, it has resorted to price increases which have improved its margin. Moreover, there is hope that Pepsi can navigate the currently mixed macroeconomic environment smoothly. Although consumers tend to shift to cheaper alternatives or reduce consumption when there are economic headwinds, Pepsi has explored different options, including smaller and high-margin packages, which have worked in its favor lately. Pepsi’s stable capital return program could also support the stock with the company on track to return about $8.2 billion this year, including $7.2 billion in dividends. That said, PM (>24% return year-to-date), and KDP (7% return), have fared better than Pepsi. The data below shows both PM and KDP outperformed PEP recently and over the last year and there is a good chance that they might repeat this. 

The data below shows both Phillip Morris and Keurig Dr Pepper outperformed PepsiCo recently and over the last year. They might repeat this. Related ideas: Better Buys and Outperformers

Pay Less Per Dollar Of Profit (EBIT) Than PepsiCo, To Get More Revenue And Profit Growth? 

Note: PEBIT = market cap / last 12M operating income | LTM = Last 12 Months (last 4 quarters)

What About Relative Market Returns?

There is evidence of the market rewarding the stronger performers, as PM stock has returned 19.7%, 34.3%, and 32.6% in the last 3, 6, and 12-month periods which is higher compared to -3.3%, 4.6%, and 0.5% for PEP.

How Did These Metrics Look 1 Year Ago – Could PEP’s Combination Of Higher Valuation & Lower Growth Persist?

PEP still had a higher valuation of $20.83 vs $13.15 for PM but higher annual growth (10.11% vs 4.3%), lower quarterly growth (10.37% vs 14.49%), and more favorable margin change (-0.5% vs -6.3%). The situation looks quite different now which means that the market reward could shift toward PM and KDP.

Note: PEBIT = market cap / last 12M operating income | LTM = Last 12 Months (last 4 quarters)

Additional Reference Metrics

Note: PS = market cap / last 12M revenue

Here’s more on Trefis’ market-beating portfolios, including HQ with downside protection.

[1] Returns as of 8/20/2024
[2] Cumulative total returns since the end of 2016

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