Snacks and beverages giant PepsiCo, Inc. (PEP) is expected to report its third-quarter earnings on October 10. Its revenue and earnings are expected to have grown strongly over the prior-year quarter.
In this piece, I have discussed why waiting for an opportune entry point in the stock could be wise.
For the third quarter, PEP’s EPS is expected to increase 9.4% year-over-year to $2.15. Its revenue for the same quarter is expected to increase 6.7% year-over-year to $23.44 billion. The company has a solid earnings history, having beaten the consensus estimate in each of the trailing four quarters.
PEP’s organic revenue grew 13% in the second quarter, marking the seventh consecutive quarter of delivering double-digit organic revenue growth. The company now expects its full-year organic revenue to increase 10%, up from the previous forecast of 8%. It also expects core EPS of $7.47 for the year, up from the previously predicted core EPS of $7.27.
Despite the rise in raw material prices, PEP has been able to offset its growing costs by raising prices across its product range, which has helped boost core gross margins. The price increases undertaken by the company across its different segments will be reflected in the third-quarter results.
Moreover, the company has been gaining market share across several categories, highlighting its resilience across various product categories. The company’s new products, the bite-size Frito-Lay Minis, which are the bite-size versions of its Doritos, Cheetos, and Sun Chips brands, are driving growth.
Over the past six months, the stock has declined 13.3% to close the last trading session at $160.29. It lost 1.8% over the past year.
Here’s what could influence PEP’s performance in the upcoming months:
Robust Financials
PEP’s net revenue for the second quarter ended June 17, 2023, increased 10.4% year-over-year to $22.32 billion. The company’s non-GAAP gross profit increased 13.1% year-over-year to $12.20 billion. Its non-GAAP net income attributable to PEP rose 12% over the prior-year quarter to $2.89 billion.
Also, its non-GAAP EPS came in at $2.09, representing an increase of 12.4% year-over-year. In addition, its non-GAAP operating profit rose 13.2% over the prior-year quarter to $3.86 billion.
Favorable Analyst Estimates
Analysts expect PEP’s EPS for fiscal 2023 and 2024 to increase 10.2% and 7.8% year-over-year to $7.48 and $8.06, respectively. Its fiscal 2023 and 2024 revenue is expected to increase 7% and 4.5% year-over-year to $92.40 billion and $96.56 billion, respectively.
Stretched Valuation
In terms of forward EV/EBITDA, PEP’s 15.55x is 42.3% higher than the 10.93x industry average. Likewise, its 2.79x forward EV/Sales is 66.6% higher than the 1.68x industry average. Its 21.42x forward non-GAAP P/E is 27.2% higher than the 16.84x industry average.
Solid Historical Growth
PEP’s revenue has grown at a 10% CAGR over the past three years and a 7% CAGR over the past five years. Its EBITDA has grown at a 7.7% CAGR over the past three years. Its net income and EPS have grown at 4.9% and 5.2% CAGRs over the past three years.
High Profitability
In terms of the trailing-12-month net income margin, PEP’s 8.76% is 110.8 higher than the 4.16% industry average. Likewise, its 17.08% trailing-12-month EBITDA margin is 49.4% higher than the industry average of 11.43%. Furthermore, the stock’s 5.79% trailing-12-month Capex/Sales is 83.5% higher than the industry average of 3.16%.
POWR Ratings Reflect Uncertainty
PEP has an overall rating of C, equating to a Neutral in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.
Our proprietary rating system also evaluates each stock based on eight distinct categories. PEP has a D grade for Value, consistent with its stretched valuation. Its high profitability justifies its A grade for Quality.
It has a B grade for Stability, in sync with its 0.58 beta.
PEP is ranked #15 out of 36 stocks in the Beverages industry. Click here to access PEP’s Growth, Momentum, and Sentiment ratings.
Bottom Line
PEP’s price increases across its product range are expected to have boosted its third-quarter revenue and earnings. Its diversified food and beverage portfolio is expected to help it boost its revenue and earnings while also helping navigate the uncertain macroeconomic environment. However, volume growth might have taken a hit across different categories and markets due to the price increases.
Given its strong growth prospects, the stock trades at an expensive valuation. Amid an uncertain macroeconomic environment, a rise in raw material prices and a fall in consumer spending may put pressure on its earnings. Moreover, the inability to maintain its current level of growth might negatively affect the stock. Considering these factors, it could be wise to wait for a better entry point in the stock.
How Does PepsiCo, Inc. (PEP) Stack Up Against Its Peers?
PEP has an overall POWR Rating of C, equating to a Neutral rating. You may check out the stocks within the Beverages industry possessing an A (Strong Buy) or B (Buy) rating: Coca-Cola Consolidated, Inc. (COKE), Compañía Cervecerías Unidas S.A. (CCU), and Suntory Beverage & Food Limited (STBFY). To access more Buy-rated Beverage stocks set to outperform, click here.
What To Do Next?
43 year investment veteran, Steve Reitmeister, has just released his 2024 market outlook along with trading plan and top 11 picks for the year ahead.
PEP shares were trading at $159.44 per share on Monday afternoon, down $0.85 (-0.53%). Year-to-date, PEP has declined -9.90%, versus a 13.54% rise in the benchmark S&P 500 index during the same period.
About the Author: Dipanjan Banchur
Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets.
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