Over the past six months, PepsiCo’s shares (currently trading at $144.08) have posted a disappointing 6.2% loss, well below the S&P 500’s 7.1% gain. This may have investors wondering how to approach the situation.
Is now the time to buy PepsiCo, or should you be careful about including it in your portfolio? Get the full breakdown from our expert analysts, it’s free.
Why Is PepsiCo Not Exciting?
Even with the cheaper entry price, we don’t have much confidence in PepsiCo. Here are three reasons you should be careful with PEP, plus one stock we’d rather own.
1. Demand Slipping as Sales Volumes Decline
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful staples business as there’s a ceiling to what consumers will pay for everyday goods; they can always trade down to non-branded products if the branded versions are too expensive.
PepsiCo’s average quarterly sales volumes have shrunk by 1.3% over the last two years. This decrease isn’t ideal because the quantity demanded for consumer staples products is typically stable.
2. Projected Revenue Growth Is Slim
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect PepsiCo’s revenue to rise by 3.4%. This projection doesn’t excite us and indicates its newer products will not accelerate its top-line performance yet.
3. EPS Barely Growing
Analyzing the long-term change in earnings per share (EPS) shows whether a company’s incremental sales were profitable — for example, revenue could be inflated through excessive spending on advertising and promotions.
PepsiCo’s EPS grew at 5% compounded annual growth rate over the last three years. On the bright side, this performance was better than its 2.4% annualized revenue growth and tells us the company became more profitable on a per-share basis as it expanded.
Final Judgment
PepsiCo isn’t a terrible business, but it isn’t one of our picks. After the recent drawdown, the stock trades at 16.4× forward P/E (or $144.08 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We’re pretty confident there are superior stocks to buy right now. We’d recommend looking at a fast-growing restaurant franchise with an A+ ranch dressing sauce.
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