PepsiCo (PEP) recently released its Q2 results, with revenues falling short of expectations but earnings surpassing estimates. The company reported revenue of $22.5 billion and adjusted earnings of $2.28 per share, compared to analysts’ estimates of $22.8 billion and $2.15, respectively. PEP stock, which is currently trading at around $165, has seen gains of 10% since early 2021, but has had inconsistent returns over the past few years, underperforming the S&P 500 in 2021 and 2023. With uncertainties in the macroeconomic environment, including high oil prices and elevated interest rates, the question arises whether PepsiCo will see a strong jump in performance or continue to lag behind the market.
From a valuation perspective, there is potential for growth in PEP stock, with an estimated valuation of $185 per share representing over 10% upside from current levels. This forecast is based on a 23x P/E multiple for PepsiCo and expected earnings of $8.15 on an adjusted basis for the full year 2024. Despite challenges in the current consumer spending environment with high inflation, PepsiCo remains optimistic about its future performance, expecting a 4% organic revenue growth and at least an 8% rise in adjusted earnings on a constant currency basis. The company has also implemented strategies such as offering smaller and high-margin packages to drive sales.
In Q2, PepsiCo saw a 2% organic growth in revenue, driven by a 5% increase in pricing which offset a 3% decline in volume. With the exception of the Quaker Foods segment, all segments showed organic sales growth. The Quaker Foods segment was significantly impacted by a recall issued by the U.S. FDA late last year, leading to a decline in sales and operating profit in Q2. However, PepsiCo’s consolidated operating profit rose 11% and the core operating margin expanded by 103 basis points, resulting in a 9% increase in adjusted earnings to $2.28 per share year-over-year.
While PepsiCo’s Q2 performance was mixed, the company faces challenges from the uncertain macroeconomic environment and potentially reduced consumer demand due to higher pricing for its products. However, the company remains focused on innovation and exploring different options to drive growth, such as offering smaller and high-margin packages. Despite these challenges, PepsiCo’s stock has room for growth, with a potential upside of over 10% from its current levels. Investors may want to keep an eye on how PepsiCo and its peers in the industry perform in the coming months to gauge the company’s future success.
