A Tough Week for PepsiCo
We’ve just wrapped up a relatively strong week in the markets. In fact, we saw green nearly across the board, and the Magnificent Seven rebounded quite strongly. But today, our spotlight is on PepsiCo—a stock that stood out for the wrong reasons, closing the week down nearly 7%. It's worth noting that this drop followed their earnings report, which was released just before Thursday’s market open.
2025 YTD: Dramatic Underperformance
Looking at 2025 year-to-date, while much of the broader market is struggling to recover and edge back into the green, PepsiCo is down more than 12%. In comparison, its peers have done considerably better—Coca-Cola is up 16%, Keurig Dr Pepper has gained 7%, and Monster Beverage is up 12%. Over the past 12 months, PepsiCo has lost a quarter of its market cap and is now trading at a 52-week low, offering a dividend yield above 4% for the first time in recent memory.
Key Question: Opportunity or Trap?
The key question: Are we looking at a compelling long-term opportunity—not just for share price appreciation, but also for reliable, growing dividend income from this dividend king? Or is this simply a value trap that should be avoided?
Analyst Sentiment: Hold Ratings Dominate
First off, let’s look at consensus sentiment. Analysts from Seeking Alpha, Wall Street, and Quant all currently rate PepsiCo as a “Hold.” But we’ll be sharing our own opinion throughout this episode.
Undervaluation Signal #1: P/E Compression
Over the last decade, PepsiCo has significantly underperformed the S&P 500—up only 40% over that time. From a valuation standpoint, the stock now trades at a forward P/E of 16, well below its five-year average of 23.9, and the lowest it’s been in at least five years—our first major undervaluation signal.
Undervaluation Signal #2: Yield Spike
The dividend yield currently stands at 4.27%, far above its five-year average of 2.88%—a second strong signal of undervaluation.
Undervaluation Signal #3: Below Fair Value Range
A third comes from a valuation model using the five-year average P/E, where the current price is not only below the midpoint, but sits beneath the lower bound of the fair value range—highlighting a sustained undervaluation.
Caution: Cheap Can Get Cheaper
But remember: stocks that look cheap can always get cheaper. And that’s why we take a deeper look.
Earnings Miss & Guidance Cut
The recent drop can largely be attributed to PepsiCo cutting its earnings guidance. Management cited headwinds including tariffs, economic uncertainty, and changing consumer behavior. On the earnings call, the CEO explicitly warned of “more volatility and uncertainty,” particularly due to global trade developments, which they expect will increase supply chain costs.
The Numbers: Weak Bottom Line
Looking at the numbers: earnings per share came in at $1.48 versus expectations of $1.49—a slight miss. Revenue beat slightly at $17.92 billion versus $17.77 billion. However, net income per share dropped year-over-year from $1.48 to $1.33—an overall weak showing.
Consumer Behavior Shifts
One key insight, also echoed in earnings calls from companies like Procter & Gamble and Chipotle, is that consumers are becoming more value-conscious. With tighter budgets and rising prices, shoppers are either buying less or switching to lower-cost private-label brands.
The GLP-1 Factor
PepsiCo also acknowledged the impact of GLP-1 weight loss drugs, noting plans to introduce more protein-rich products to win back health-conscious consumers—a strategy worth watching in the years ahead.
Revenue Mix: Beverages, Snacks & Geography
About 42% of PepsiCo’s revenue comes from beverages, and roughly 60% of sales are from North America, with the rest international. Notably, international sales are growing faster—up double digits—while North American growth remains muted.
Capital Return Track Record
Despite the current headwinds, PepsiCo has a strong record of capital return. It’s a dividend king with 53 consecutive years of dividend increases. The dividend safety score sits at 93, and they recently raised the dividend by 5%—above our 4% inflation-adjusted benchmark. The company also engages in occasional share buybacks, adding to shareholder returns.
Management’s Long-Term Growth Targets
Their latest investor presentation outlines long-term targets of 4–6% annual revenue growth and high single-digit EPS growth. While those figures weren’t met this quarter, management accountability and progress toward these goals will be key to monitor.
Forward Estimates: Moderate Optimism
Looking ahead, analysts expect growth in three of the next four quarters, albeit at mid-single-digit levels. PepsiCo currently has a 75% beat rate over the last four quarters. And for those looking out to December 2026, it trades at a forward P/E of about 15.6.
Institutional Sentiment: Mildly Bullish
As for institutional sentiment: institutions hold 73% of the float, with roughly equal buying and selling over the past year. However, in Q1 2025, net institutional buying edged higher, totaling $4.4 billion in purchases versus $400 million in selling.
Insider Activity: Minimal Impact
Insider activity has been minimal—just $1 million in selling over the past year, with no recent transactions in Q1 or Q2. As always, we don't read too much into insider selling—it often reflects personal financial decisions, not necessarily a bearish outlook.
Dividend History: Decades of Consistency
On the dividend front, PepsiCo has been paying uninterrupted dividends for over 60 years. Dividend growth averaged 7% over both the last five and ten years—comfortably above inflation.
Cash Flow Warning Sign
But here’s where we need to raise a flag: PepsiCo’s free cash flow payout ratio has consistently been above our 70% target since 2018. That’s concerning, as high payout ratios may limit future dividend growth and buyback potential, especially if earnings continue to face pressure.
Concerning Payout Ratios in 2024
We’re now seeing the payout ratio climb into the triple digits in 2024—a clear red flag. We saw similar behavior in 2022, and it points to a critical issue: PepsiCo is paying out more in dividends than it's generating in free cash flow. That’s never a good sign. While projections show this ratio could fall back to around 70% over the next 12 months, it’s worth remembering that it hasn’t consistently stayed below that threshold since 2017. This is a meaningful short-term concern.
Lack of Consistent Free Cash Flow Growth
When we examine free cash flow per share, we want to see consistent, long-term growth. But from 2015 to 2024, that hasn’t been the case. It’s been flat and erratic. While some are forecasting a sharp jump to $8.15 over the next 12 months, that feels optimistic given the weak recent earnings report and sluggish sales.
Top-Line Growth Disappoints
We aim for 3% to 7% revenue growth to at least stay ahead of inflation. In 2024, PepsiCo is showing 0% top-line growth—meaning negative real growth. Trailing 12-month figures also show no growth. This is not a company delivering consistent revenue expansion. While revenue is up nearly 50% over the past decade, the path has been choppy, not smooth.
Buybacks and Capital Return
Share buybacks are minimal. Management has not aggressively repurchased shares, even with prices now near multi-year lows. Whether that changes depends on whether they believe the stock offers compelling value.
Return on Invested Capital Remains Strong
One positive: PepsiCo has consistently delivered a strong ROIC—hovering around 16%, which is well above our 12% benchmark for the consumer staples sector. This indicates management is allocating capital effectively.
Margins Under Pressure
Operating margins straddle the 16% minimum threshold for consumer staples. Ideally, we want to see margin expansion alongside revenue growth—but PepsiCo hasn’t shown much improvement in this area. Free cash flow margins are also holding just above our 7% floor but have been declining over time.
Balance Sheet: Stable but Pressured
PepsiCo’s net debt-to-EBITDA ratio sits around 2x—below our maximum threshold of 4x for dividend safety. While the balance sheet currently looks manageable, the combination of high payout ratios and declining free cash flow means this area needs attention.
Growth Grade: A D for a Reason
PepsiCo earns a D for growth. Year-over-year revenue growth is under 1%, and projections going forward are only slightly higher. That trails both the sector and PepsiCo’s own historical five-year average of 7.2%. EPS growth estimates from analysts sit at just 4%—far below management’s previous high-single-digit target.
Profitability: A+ Grade Despite No Margin Growth
On the profitability side, PepsiCo scores an A+. Gross margins at 55% are well above the sector median of 36%, and net margins at 10.5% are strong. However, these haven’t materially improved over time. Cash from operations did rise slightly to $12.5 billion, above their five-year average of $11.4 billion and far ahead of the sector median.
Peer Comparison: Weakest Total Return Amongst Competitors When comparing total return (with dividends reinvested), PepsiCo is the worst performer among peers—down 22% over the past year. Coca-Cola is up 20% over that period. Over 5 and 10 years, PepsiCo has also significantly underperformed, with just 15% total return over 5 years and continued lag versus Coca-Cola, Monster, and KDP.
Massive Underperformance vs. the S&P 500 PepsiCo’s underperformance is even more stark when compared to the broader market. Over the past year, it’s down 22%, while the S&P 500 is up 10%. Over 5 years, PepsiCo is up 15%—versus 92% for the S&P. Over 10 years, the gap only widens further.
Bottom Line & Income Statement Insights Although PepsiCo’s revenue has grown by nearly 50% over the past decade, it’s not the kind of growth you want to see—slow, and sometimes inconsistent. Net income has grown from $5.5 billion to $9.6 billion over the same period, with some volatility in between.
Balance Sheet Check: Rising Debt, Shrinking Cash Total cash has decreased from $12 billion in 2015 to $8.5 billion today, while total debt has climbed from $34 billion to $49 billion. That’s not a great directional trend—shrinking liquidity and rising leverage.
Macro Headwinds & Investor Sentiment
Tariffs, economic uncertainty, and weak consumer demand are weighing on results. However, market sentiment is improving—moving from extreme fear to just fear. If macro conditions stabilize, PepsiCo could start looking attractive to more investors.
Relative Valuation: PepsiCo Looks Cheap In today’s overvalued market—where some companies trade at P/E ratios of 25 to 35—PepsiCo stands out, trading at just 15–16x forward earnings. That’s not only well below its five-year average but also below Coca-Cola’s 22.5x. Whether you believe that discount is warranted depends on how you assess its fundamentals.
Valuation Models
Intrinsic Value Around $161 Using three valuation models, we estimate PepsiCo’s fair value at $161 per share:
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Multiples-based model: shows undervaluation using peer P/Es
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Dividend Discount Model: 5.25% projected dividend growth implies undervaluation
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Discounted Cash Flow Model: our only overvaluation signal based on conservative 0% past FCF growth and a 7% future rate
We average these models to get our fair value estimate but always apply a margin of safety.
Our Buy Zones & Wall Street Price Target If you require a 15–20% margin of safety, your target buy zone is between $129 and $137. At 25% MOS, that drops to $121; at 30%, it’s $113. Wall Street's 12-month price target is $162, implying 22% upside from today’s levels.
Final Thoughts: Discounted Giant or Risky Hold?
In summary, while PepsiCo trades at a substantial discount to its five-year averages—offering attractive dividend income and a strong brand portfolio—it’s also navigating real challenges. From cautious consumers to inflationary costs and macro uncertainty, the risks are real.
That’s why we always apply a margin of safety and run our own valuation model, which we’ll walk you through next—along with Wall Street’s 12-month price expectations.
Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.
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