Thematic evaluation
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PepsiCo, Inc. (PEP)

October 05, 2024

Compared to: Coca-Cola Consolidated, Inc. (COKE) | Monster Beverage Corp. (MNST) | Consumer Staples Select Sector SPDR Fund (XLP)

Our reasoning

PepsiCo appears moderately undervalued based on its strong financial performance, robust brand portfolio, and growth prospects, particularly in international markets. The company's valuation multiples are below industry averages despite superior profitability metrics and a solid track record of execution, suggesting the market may be underestimating PepsiCo's resilience and growth potential.

Key takeaways
  • PepsiCo is a financially strong company with a solid track record of profitability and cash flow generation, but faces intense competition and evolving regulatory pressures in its industry.
  • The company's international operations, which account for a significant portion of its business, expose it to foreign exchange risks and volatile economic, political, and social conditions in certain markets.
  • PepsiCo has been impacted by the ongoing conflict in Ukraine, leading to reduced operations in Russia, and a recent voluntary product recall in its QFNA division, both of which have resulted in substantial charges.
  • Key risks include maintaining brand reputation, ensuring product quality and safety, navigating supply chain disruptions and cost inflation, managing cybersecurity threats, and attracting/retaining a skilled and diverse workforce.
  • Despite these challenges, PepsiCo has demonstrated resilience, driving revenue and profit growth through effective pricing, productivity savings, and ongoing investments in its operations and productivity initiatives.
  • The company maintains a strong liquidity position, which should provide financial flexibility to navigate the current business environment, though it faces potential legal liabilities from various lawsuits and regulatory proceedings.
  • PepsiCo's valuation is supported by its strong fundamentals and growth potential, but its price performance has lagged behind its peer COKE.
  • Overall, PepsiCo is a well-managed company with a strong financial position and a promising future outlook, but investors should be aware of the risks associated with the company's business.
Undervalued
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Evaluation summary

  1. Company Overview:

    • PepsiCo, Inc. (PEP) is a leading global beverage and convenient food company with a diverse portfolio of well-known brands, including Lay's, Doritos, Cheetos, Gatorade, Pepsi-Cola, Mountain Dew, Quaker, and SodaStream. The company operates through seven reportable segments: Frito-Lay North America (FLNA), Quaker Foods North America (QFNA), PepsiCo Beverages North America (PBNA), Latin America (LatAm), Europe, Africa, Middle East and South Asia (AMESA), and Asia Pacific, Australia and New Zealand and China Region (APAC).
    • PEP's products are distributed through direct-store-delivery, customer warehouse, and distributor networks, as well as e-commerce channels. Key customers include independent bottlers, distributors, retailers, foodservice customers, and consumers in over 200 countries and territories.
    • PEP targets a broad consumer base across various demographics and income levels, with a focus on providing convenient, affordable, and tasty food and beverage options.
    • For comparative analysis, we will be using the Consumer Staples Select Sector SPDR Fund (XLP) as a benchmark and Monster Beverage Corp. (MNST) and Coca-Cola Consolidated, Inc. (COKE) as industry peers.

  2. Financial Performance:

    • PEP has demonstrated consistent revenue growth over the past few years, driven by effective net pricing and productivity savings. However, the company has faced challenges from increased operating costs, higher commodity prices, and volume declines in certain product categories.
    • The company's profitability is strong, as evidenced by its high return on average assets (ROA), return on average total equity (ROE), and return on average total capital (ROIC). PEP's profitability is significantly higher than the industry average, suggesting that the company is able to generate strong profits relative to its assets and equity.
    • PEP's operating margin has improved in recent quarters, reflecting strong productivity gains across the organization. The company is leveraging its productivity pipeline to fund investments in its Frito-Lay and PBNA businesses, allowing them to address value and pricing concerns while also driving growth.
    • Compared to its peers, PEP has outperformed MNST in terms of profitability and risk-adjusted returns, but it has lagged behind COKE's strong growth. PEP's lower volatility and smaller drawdowns suggest a more conservative investment approach with a lower risk profile.

  3. Operational Efficiency:

    • PEP's balance sheet has shown a steady increase in total assets over the past few years, driven by investments in its operations and strategic initiatives.
    • The company's working capital management has been relatively stable, with a slight increase in working capital in recent quarters.
    • PEP's cash flow from operations has been consistently strong, driven by its high profitability and efficient cost management. The company's free cash flow has also been robust, providing financial flexibility to navigate the current business environment.
    • PEP's capital expenditure has been relatively stable, with a slight increase in recent quarters, reflecting investments in its manufacturing and supply chain footprint.
    • The company's dividend growth has been sustainable, as PEP has a strong track record of profitability and cash flow generation.
    • PEP's liquidity position is strong, as evidenced by its current ratio and quick ratio. The company's solvency is also strong, as evidenced by its debt-to-equity ratio and debt-to-EBITDA ratio.
    • Compared to its peers, PEP has exhibited lower volatility and smaller drawdowns than MNST and COKE, suggesting a more conservative investment approach with a lower risk profile.

  4. Growth Opportunities:

    • PEP is focused on international expansion, particularly in high-growth markets like India, where it is investing in infrastructure and brand building.
    • The company is also leveraging its strong partnership with Carlsberg to support the Britvic transaction in the UK, demonstrating its strategic approach to international collaborations.
    • PEP continues to invest in its 2019 multi-year productivity plan to simplify operations and optimize its manufacturing and supply chain footprint.
    • The company is also investing in innovation and brand building to address evolving consumer preferences and trends.
    • PEP's capital allocation strategies are aligned with its long-term growth goals, with a focus on investing in its core businesses, expanding into new markets, and returning capital to shareholders through dividends and share repurchases.
    • Management has a strong track record of executing strategic plans, as evidenced by the company's consistent revenue and profit growth.

  5. Risks and Threats:

    • PEP faces several risks, including intense competition, evolving regulatory pressures, and volatile economic, political, and social conditions in certain markets.
    • The company's international operations expose it to foreign exchange risks and potential disruptions in its supply chain.
    • PEP has been impacted by the ongoing conflict in Ukraine, leading to reduced operations in Russia, and a recent voluntary product recall in its QFNA division, both of which have resulted in substantial charges.
    • Other key risks include maintaining brand reputation, ensuring product quality and safety, navigating supply chain disruptions and cost inflation, managing cybersecurity threats, and attracting/retaining a skilled and diverse workforce.

  6. Valuation Analysis:

    • PEP's valuation metrics, such as its P/E ratio and EV/EBITDA ratio, are generally in line with its peers.
    • The company's valuation is supported by its strong profitability, robust cash flow generation, and growth opportunities.
    • Potential catalysts for PEP's valuation include continued revenue growth, margin expansion, and successful execution of its strategic initiatives.

  7. Price Performance:

    • PEP's stock price has generally outperformed MNST but has consistently underperformed COKE.
    • PEP's price performance has been relatively stable, with lower volatility than its peers.
    • PEP's beta value below 1 indicates that it is less sensitive to market movements than the overall market. However, its beta is slightly higher than XLP's, suggesting that PEP may be slightly more volatile than XLP.

  8. Future Outlook:

    • Management has expressed confidence in PEP's ability to deliver continued revenue growth and profitability in the coming quarters.
    • The company is expected to continue investing in its productivity initiatives and strategic growth plans.
    • Analyst estimates for PEP's future performance are generally positive, with consensus expectations for continued revenue growth and margin expansion.

  9. Summary:

    • PEP is a financially strong company with a solid track record of profitability and cash flow generation.
    • The company has a diverse portfolio of well-known brands and a strong global presence.
    • PEP faces several risks, including intense competition, evolving regulatory pressures, and volatile economic conditions.
    • The company's growth opportunities are driven by its international expansion plans, investments in innovation, and focus on productivity improvements.
    • PEP's valuation is supported by its strong fundamentals and growth potential.
    • The company's price performance has been relatively stable, with lower volatility than its peers.
    • Overall, PEP is a well-managed company with a strong financial position and a promising future outlook. However, investors should be aware of the risks associated with the company's business, including competition, regulation, and economic volatility.
Peer fundamentals 
Fundamentals
Insights
  • PepsiCo is a leading global beverage and convenient food company with a diverse portfolio of well-known brands, but faces intense competition and evolving regulatory pressures in its industry.
  • The company's international operations, which account for a significant portion of its business, expose it to foreign exchange risks and volatile economic, political, and social conditions in certain markets.
  • PepsiCo has been impacted by the ongoing conflict in Ukraine, leading to reduced operations in Russia, and a recent voluntary product recall in its QFNA division, both of which have resulted in substantial charges.
  • Key risks include maintaining brand reputation, ensuring product quality and safety, navigating supply chain disruptions and cost inflation, managing cybersecurity threats, and attracting/retaining a skilled and diverse workforce.
  • Despite these challenges, PepsiCo has demonstrated resilience, driving revenue and profit growth through effective pricing, productivity savings, and ongoing investments in its operations and productivity initiatives.
  • The company maintains a strong liquidity position, which should provide financial flexibility to navigate the current business environment, though it faces potential legal liabilities from various lawsuits and regulatory proceedings.
  • The company's profitability is strong, as evidenced by the high return on average assets, return on average total equity, and return on average total capital.
  • The company's profitability is significantly higher than the industry average, which suggests that the company is able to generate strong profits relative to its assets and equity.
  • The company's liquidity position is strong, as evidenced by the current ratio and quick ratio.
  • The company's solvency is strong, as evidenced by the debt-to-equity ratio and debt-to-EBITDA ratio.
  • The company's efficiency is strong, as evidenced by the high return on average assets and return on average total equity.
  • The company's cash flow is expected to continue to grow in the coming quarters, driven by its continued investment in its operations and its strategic initiatives.
  • The company's free cash flow is expected to remain strong, which should provide financial flexibility to navigate the current business environment.
  • The company's dividend growth is expected to remain sustainable, as the company has a strong track record of profitability and cash flow generation.
  • The company's balance sheet is expected to continue to grow in the coming quarters, driven by its continued investment in its operations and its strategic initiatives.
  • The company's liquidity position is expected to remain strong, which should provide financial flexibility to navigate the current business environment.
  • The company's debt-to-equity ratio is expected to remain elevated, but this is not necessarily a cause for concern, as the company has a strong track record of profitability and cash flow generation.
  • The company's intangible assets are decreasing, which could be a sign of declining brand value or goodwill impairment.
  • The company's debt-to-equity ratio is significantly higher than the industry average, which could be a concern if the company's profitability declines.
  • The company's international operations, which account for over 40% of consolidated net revenue, expose it to foreign exchange risks and volatile economic, political, and social conditions in certain markets.
  • The company is expected to continue to experience strong revenue growth and profitability.
  • The company is expected to continue to invest in its 2019 multi-year productivity plan to simplify operations and optimize its manufacturing and supply chain footprint.
Analysis
  • Revenue - Revenue growth is increasing, but the trend is decreasing. - The company's revenue growth is driven by effective net pricing and productivity savings, partially offset by increased operating costs, higher commodity prices, and volume declines in certain product categories. - The company's international operations, which account for over 40% of consolidated net revenue, expose it to foreign exchange risks and volatile economic, political, and social conditions in certain markets.
    • Profitability
      • The company's profitability is strong, as evidenced by the high return on average assets, return on average total equity, and return on average total capital.
      • The company's profitability is significantly higher than the industry average, which suggests that the company is able to generate strong profits relative to its assets and equity.
      • The company's profitability is expected to continue to grow in the coming quarters, driven by its continued investment in its operations and its strategic initiatives.
    • Liquidity
      • The company's liquidity position is strong, as evidenced by the current ratio and quick ratio.
      • The company's current ratio is slightly lower than the industry average, but still indicates a healthy ability to meet short-term obligations.
      • The company's liquidity position is expected to remain strong, which should provide financial flexibility to navigate the current business environment.
    • Solvency
      • The company's solvency is strong, as evidenced by the debt-to-equity ratio and debt-to-EBITDA ratio.
      • The company's debt-to-equity ratio is significantly higher than the industry average, but this is likely due to the company's large size and its reliance on debt financing for acquisitions and expansion.
      • The company's debt-to-EBITDA ratio is significantly lower than the industry average, which suggests that the company has a strong ability to service its debt.
      • The company's debt-to-equity ratio is expected to remain elevated, but this is not necessarily a cause for concern, as the company has a strong track record of profitability and cash flow generation.
    • Operational Efficiency
      • The company's efficiency is strong, as evidenced by the high return on average assets and return on average total equity.
      • The company is able to generate strong profits relative to its assets and equity.
    • Cash Flow Analysis
      • The company's cash flow is expected to continue to grow in the coming quarters, driven by its continued investment in its operations and its strategic initiatives.
      • The company's free cash flow is expected to remain strong, which should provide financial flexibility to navigate the current business environment.
      • The company's dividend growth is expected to remain sustainable, as the company has a strong track record of profitability and cash flow generation.
    • Risk Factors
      • The company's intangible assets are decreasing, which could be a sign of declining brand value or goodwill impairment.
      • The company's debt-to-equity ratio is significantly higher than the industry average, which could be a concern if the company's profitability declines.
      • The company's international operations, which account for over 40% of consolidated net revenue, expose it to foreign exchange risks and volatile economic, political, and social conditions in certain markets.
    • Future Outlook
      • The company is expected to continue to experience strong revenue growth and profitability.
      • The company is expected to continue to invest in its 2019 multi-year productivity plan to simplify operations and optimize its manufacturing and supply chain footprint.
      • The company's balance sheet is expected to continue to grow in the coming quarters, driven by its continued investment in its operations and its strategic initiatives.
      • The company's liquidity position is expected to remain strong, which should provide financial flexibility to navigate the current business environment.
      • The company's debt-to-equity ratio is expected to remain elevated, but this is not necessarily a cause for concern, as the company has a strong track record of profitability and cash flow generation.
      • The company's cash flow is expected to continue to grow in the coming quarters, driven by its continued investment in its operations and its strategic initiatives.
      • The company's free cash flow is expected to remain strong, which should provide financial flexibility to navigate the current business environment.
      • The company's dividend growth is expected to remain sustainable, as the company has a strong track record of profitability and cash flow generation.
Most recent earnings report
Financial statements 
All public filings
Comparative Analysis
Benchmarks (as of 2024-10-04)
Consumer Staples Select Sector SPDR Fund (XLP)
  • Performance Comparison:
    • PEP has consistently underperformed XLP over all the listed periods, indicating that XLP has been a better investment choice for investors seeking growth. This underperformance is particularly pronounced in the longer-term periods, with PEP underperforming XLP by 18.27% over the past two years and 6.5% over the past three years.
    • The underperformance of PEP can be attributed to several factors, including its exposure to a more competitive and volatile beverage market, its reliance on a mature product portfolio, and its relatively high debt levels.
  • Risk and Return Analysis:
    • PEP has provided lower annualized returns than XLP over all the listed periods, indicating that XLP has been a more profitable investment. This is consistent with PEP's underperformance in terms of stock price growth.
    • PEP has exhibited higher annualized volatility than XLP, indicating that PEP's price movements have been more erratic than XLP's. This suggests that PEP carries a higher risk profile than XLP, as its price is more susceptible to market fluctuations.
    • PEP's maximum drawdown of 18.26% is slightly higher than XLP's maximum drawdown of 16.3%, further supporting the notion that PEP has a slightly higher risk profile than XLP. This indicates that PEP is more vulnerable to significant price declines during market downturns.
  • Risk-Adjusted Performance:
    • XLP has consistently offered a better risk-adjusted return than PEP, as evidenced by its higher Sharpe ratio. This suggests that XLP has been a more efficient investment, generating higher returns for a given level of risk.
    • PEP's beta value below 1 indicates that it is less sensitive to market movements than the overall market. However, its beta is slightly higher than XLP's, suggesting that PEP may be slightly more volatile than XLP.
  • Overall Assessment:
    • PEP has consistently underperformed XLP in terms of both absolute and risk-adjusted returns. This suggests that XLP has been a more attractive investment choice for investors seeking growth and risk-adjusted performance.
    • PEP's higher volatility and larger maximum drawdown indicate that it carries a higher risk profile than XLP. This suggests that PEP may be a less suitable investment for risk-averse investors.
    • While PEP's beta value below 1 suggests a lower risk profile than the overall market, its slightly higher beta compared to XLP indicates that it may be slightly more volatile than XLP.
    • Overall, the analysis suggests that XLP has been a more attractive investment choice than PEP, offering better risk-adjusted returns and a lower risk profile. However, investors should consider their individual risk tolerance and investment goals before making any investment decisions.
Peers Price History(as of 2024-10-04)
Coca-Cola Consolidated, Inc. (COKE)Monster Beverage Corp. (MNST)
  • Performance Comparison:
    • PEP has outperformed MNST in all periods, with the exception of the 1-month period. However, PEP has consistently underperformed COKE in all periods. This suggests that PEP has been a more stable investment than MNST but has lagged behind COKE's strong growth.
  • Risk and Return Analysis:
    • PEP has provided lower annualized returns than COKE but higher returns than MNST in all periods. This indicates that PEP has been a more conservative investment than COKE but has outperformed MNST in terms of returns.
    • PEP has exhibited lower annualized volatility than MNST and COKE in all periods, with the exception of Q2 2023 when MNST experienced a significant spike in volatility. This suggests that PEP has been a less volatile investment than its peers.
    • PEP's maximum drawdown of 18.26% in Q3 2023 is significantly lower than MNST's maximum drawdown of 57.18% in Q3 2024 and COKE's maximum drawdown of 35.52% in Q3 2022. This indicates that PEP has a lower risk profile than its peers, as it has experienced smaller and less frequent drawdowns.
  • Risk-Adjusted Performance:
    • PEP's Sharpe ratio has generally been higher than MNST's, suggesting better risk-adjusted returns. However, COKE's Sharpe ratio has consistently been higher than PEP and MNST, indicating the best risk-adjusted returns.
    • PEP's beta values consistently below 1 indicate a lower risk profile compared to MNST and COKE, suggesting less sensitivity to market movements.
  • Overall Assessment:
    • PEP has consistently outperformed MNST in terms of performance and risk-adjusted returns, but it has lagged behind COKE's strong growth. PEP's lower volatility and smaller drawdowns suggest a more conservative investment approach with a lower risk profile. While PEP's returns have been lower than COKE's, its lower risk profile may be attractive to investors seeking a more stable investment.
    • The significant volatility fluctuations experienced by MNST may be a concern for investors, while COKE's strong growth and high Sharpe ratio may be attractive to investors seeking higher returns.
    • Investors should consider their individual risk tolerance and investment goals when evaluating these three companies.
Peers Fundamentals(as of 2024-06-30)
Coca-Cola Consolidated, Inc. (COKE)Monster Beverage Corp. (MNST)
  1. Market Position and Size:
    • PEP is the largest company in the peer group, with a market capitalization significantly exceeding its competitors, Monster Beverage Corp. (MNST) and Coca-Cola Consolidated, Inc. (COKE). This size advantage is reflected in PEP's revenue, EBITDA, and net income, which are all significantly higher than its peers.
  2. Profitability and Efficiency:
    • PEP exhibits strong profitability metrics, exceeding both peer and industry averages. Its Gross Profit Margin, EBITDA Margin, and Net Profit Margin are all significantly higher than its peers and the industry average. However, PEP's efficiency in generating returns is mixed, with strong performance in equity-based returns but weaker performance in asset-based returns.
  3. Financial Health and Stability:
    • PEP's liquidity position is weaker than its peers, suggesting potential challenges in meeting short-term obligations. However, its high debt levels, while exceeding industry norms, are managed effectively, as evidenced by its strong profitability and cash flow generation.
  4. Valuation and Market Perception:
    • PEP's valuation is generally in line with its peers, suggesting that the market perceives it as a solid investment with a reasonable price tag. However, its low P/E ratio compared to the industry average may indicate a potential undervaluation by the market.
  5. Cash Flow and Capital Management:
    • PEP's cash flow generation is strong compared to its peers, considering its significantly larger market cap. Its Net Operating Cash Flow, Total Capital Expenditure, and Free Cash Flow are all significantly higher than its peers. This demonstrates its ability to invest in growth initiatives and return value to shareholders.
  6. Growth and Future Prospect:
    • PEP's growth trends are mixed compared to its peer group average. PEP consistently shows lower growth in sales revenue, EBITDA, net income, basic earnings per share, free cash flow, free cash flow margin, and total assets compared to the peer group average. However, PEP shows consistently higher growth in book value per share and EBIT margin compared to the peer group average. This suggests a potential shift in its strategy towards profitability and efficiency rather than rapid expansion.
  7. Potential for Investment:
    • PEP presents a mixed investment proposition. Its strong profitability, robust cash flow generation, and large market capitalization make it a stable and reliable investment. However, its slower growth rates and weaker asset-based returns compared to its peers raise concerns about its future growth potential and competitive position. Additionally, its high debt levels, while managed effectively, expose it to potential financial risks.
  8. Key Risks and Considerations:
    • PEP's slower growth rates and weaker asset-based returns compared to its peers suggest that it may be facing challenges in maintaining its market share and competitive edge. Additionally, its high debt levels, while managed effectively, expose it to potential financial risks.
  9. Overall Assessment:
    • PEP exhibits strong overall financial health, characterized by robust profitability, solid cash flow generation, and a large market capitalization. However, its slower growth rates, weaker asset-based returns, and high debt levels present potential areas for improvement. PEP's dominant market position and strong financial performance make it a stable and reliable investment, but its growth potential and competitive position may be limited compared to its peers.