Consumer-staples stocks have gotten hit hard in recent weeks, and
PepsiCo
hasn’t escaped the carnage. With the steady-Eddie beverage and snack giant set to report earnings on Oct. 10, its stock could be ready to pop.
No one seems to want a consumer staple these days. Safety is out, the result of an economy that has thus far avoided a recession, and the
Consumer Staples Select Sector SPDR
exchange-traded fund (ticker: XLP) has now dropped 13% from its May peak. Nor does it help that the 10-year Treasury yield has risen to its highest level in 16 years, making staples’ dividends far less attractive. Even worse, a panic has gripped investors over the potential for weight-loss drugs to cause sales of snacks and soda to crater. Pepsi (PEP), for its part, has slumped 18% over the same period.
But earnings could help propel Pepsi’s stock higher. Analysts are looking for sales to grow 6% to $23.4 billion of sales in the third quarter, according to FactSet. Operating margins could rise by about a tenth of a percentage point to 16.4%, helping earnings per share rise an expected 9%, to $2.15.
The best news is that shipments for Pepsi’s Frito-Lay North America division have recently been growing over 6%, according to Goldman Sachs’ review of Nielsen data, while shipments for Pepsi Beverages North America have been growing just under 5%.
“We expect a slight top & bottom line beat, driven by strong underlying momentum internationally, and healthy demand for Frito-Lay North America and PepsiCo North America as consumer elasticities remain resilient despite the challenging macro environment,” writes Goldman analyst Bonnie Herzog.
Much of the recent sales gains have been driven by price increases, but the goal is to have volume growth do the heavy lifting, especially as Pepsi faces competition from cheaper private-label offerings. Goldman expects mid-single-digit volume growth in 2024 with fewer price increases, while the consensus analyst sales forecast calls for about 5% total sales growth in 2024, to $96.8 billion. That would help bring EPS up just under 8%, to $8.06.
“Now [PepsiCo] can be more moderate on pricing and return emphasis to increased volume growth,” says Markus Hansen, a portfolio manager at Vontobel Asset Management, which owns the stock.
Pepsi stock fell 5.2% on Thursday on concerns that weight-loss drugs will cause snackers to forgo Frito-Lays and other products. Those concerns seem overblown, says RBC analyst Nik Modi, who notes that the cost and availability could make the worst-case scenario not nearly as bad as the market has started to price in.
The recent declines also mean that Pepsi stock is cheaper than it has been in a while. It trades at 19.4 times 12-month forward earnings, down from its five-year average of 23.2 times. And while its valuation is 9% higher than the S&P 500’s current 17.7 times earnings, that’s less than a quarter of its typical 40% premium. Shares are at an “attractive valuation, especially considering PEP’s accelerating growth,” writes Herzog.
Expect a sparkling stock price performance after earnings.
Write to Jacob Sonenshine at [email protected]
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