HomeMost PopularPepsiCo: Unlocking Strong Growth Through Pricing Strategies and Innovation

PepsiCo: Unlocking Strong Growth Through Pricing Strategies and Innovation

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PepsiCo (NASDAQ:PEP) has established itself as the leader in the global beverage and convenience food industry. With a focus on portfolio premiumization and a track record of impressive net pricing growth, the company has consistently delivered strong results. Despite recent concerns regarding GLP-1 anti-obesity drugs potentially impacting future growth, I remain bullish on PepsiCo’s long-term prospects. The recent dip in the stock price presents an attractive buying opportunity for investors, and I strongly recommend considering PepsiCo as a ‘Strong Buy’.

Premiumization Drives Net Pricing Growth

Over the past decade, PepsiCo has experienced significant net pricing growth, as illustrated in the chart below. By raising prices across its product categories in response to inflation, the company achieved a remarkable 14% net pricing growth while maintaining flat volume in FY22. This exemplifies PepsiCo’s pricing power and ability to generate impressive returns.

PEP Volume and Pricing Growth

PepsiCo’s net pricing growth can be attributed to several factors. Firstly, the company has successfully responded to consumer demands for healthier options by introducing zero-sugar brands like Lifewtr, Propel, and Bubly. These products not only cater to health-conscious consumers but also offer higher margins for PepsiCo due to their advanced technology.

Secondly, PepsiCo has extended its existing brands into new spaces, such as combining coffee with cold brew or introducing Gatorade into café and energy plus hydration segments. These innovations leverage the company’s existing infrastructure and have the potential to drive higher gross profits.

Lastly, PepsiCo’s expansion into small and multi-packs, exemplified by the introduction of Minis, offers bite-sized snacks that can significantly boost profit margins. Overall, PepsiCo’s focus on premiumization and innovation has been instrumental in driving net pricing growth and expanding its market reach.

Premiumization: Fueling Growth and Creating Opportunities

By leveraging premiumization strategies, PepsiCo has achieved solid organic revenue and core EPS growth. The company’s portfolio extensions and the introduction of new small brands have allowed them to broaden their target customer base, optimize distribution models, and improve operational efficiencies.

PEP Growth

During their recent earnings call, PepsiCo’s management team highlighted the importance of their innovations with Gatorade FIT and Gatorade for long-term growth. These subsegments, along with the G Zero brand, have the potential to attract new consumers and generate significant additional revenues for the company.

PepsiCo’s commitment to product premiumization and expansion into new spaces has proven successful, driving reliable growth and positioning the company for continued success in the future.

Dispelling Concerns: GLP-1 Anti-Obesity Drugs

While the recent launch of GLP-1 anti-obesity drugs by Novo Nordisk (NVO) may have caused some market concern, I believe the impact on PepsiCo is immaterial. These drugs, known for their association with appetite regulation and weight loss, are still in their early stages. During PepsiCo’s Q3 FY23 earnings call, management stated that there are no business impacts from these drugs at present.

Clinical trials have already shown that GLP-1 drugs can result in gastrointestinal side effects and require weekly injections throughout patients’ lives. These factors, coupled with the high cost of the drugs, could limit their adoption and only appeal to a small subset of individuals with severe obesity.

Moreover, PepsiCo has been diligently implementing a product premiumization strategy, focusing on new cooking methods for their snacks instead of solely relying on low-sodium, low-fat, and low-sugar products. This proactive approach positions PepsiCo to cater to evolving consumer preferences and mitigate any potential challenges arising from the introduction of GLP-1 drugs.

All in all, the concerns surrounding GLP-1 drugs and their impact on PepsiCo are unwarranted, and I believe the company will continue thriving.

Financial Analysis and Outlook

PepsiCo’s financials are a testament to the company’s solid management and strategic decision-making. With respected gross margins, strong free cash flow margins, and a healthy balance sheet, PepsiCo is well-positioned for long-term success.

PEP Financials

Looking ahead, PepsiCo targets 4-6% organic revenue growth and 20-30bps annual margin expansion, resulting in high-single-digit EPS growth when combined with share repurchases. These ambitious yet achievable goals align with the company’s historical performance, and I anticipate PepsiCo’s growth rate to remain at the upper range of their long-term guidance.

In Q3 FY23, PepsiCo delivered a strong quarterly performance with 8.8% organic revenue growth and 16% EPS growth. This performance, along with the company’s preliminary FY24 guidance of continued strong growth, signals management’s confidence in PepsiCo’s near-term prospects.

Risks and Valuation

While PepsiCo continues to demonstrate consistent growth, there are certain risks to consider. Sluggish consumer consumption, particularly in high-interest rate environments, could lead to reduced spending on snacks and beverages. Additionally, PepsiCo’s exposure to emerging markets, such as China and Latin American countries, presents the risk of volatile consumption patterns and growth.

Nevertheless, my valuation analysis suggests that PepsiCo is undervalued. Using a discounted cash flow (DCF) model, I estimate a fair value of $190 per share. This valuation accounts for a 5% organic revenue growth rate, acquisitions contributing approximately 1.3% to growth, and margin expansion driven by operating leverage and net pricing growth.

Verdict: A Compelling Investment Opportunity

In conclusion, PepsiCo represents a well-managed global powerhouse that is currently undervalued. The short-term concerns related to the GLP-1 drugs have overshadowed the company’s strong fundamentals and growth potential. With its focus on premiumization and innovation, PepsiCo is well-positioned for long-term success. I confidently assign a “Strong Buy” rating to PepsiCo and recommend considering it as a lucrative investment opportunity.

Editor’s Note: This article was submitted as part of Seeking Alpha’s Best Value Idea investment competition, which runs through October 25. With cash prizes, this competition – open to all contributors – is one you don’t want to miss. If you are interested in becoming a contributor and taking part in the competition, click here to find out more and submit your article today!

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