PepsiCo's (PEP -0.43%) stock has a lot going for it in 2023. Its last few earnings updates showed that it could boost sales and earnings even as shoppers spent less freely on groceries. And the consumer staples giant is positioned for growth through what could be a rocky time for the economy.
Yet the stock has underperformed the market so far this year on worries about slowing sales and declining profit margins. So, let's take a closer look at Pepsi's potential as an investment in 2023 ahead of its upcoming earnings update in late April.
Pricing power
At a glance, PepsiCo's latest earnings report suggested no growth struggles. Organic sales ended the year on a strong note, jumping 15% in the fourth quarter and rising by 14% for the full 2022 year.
There were signs of gathering demand struggles, though. Pepsi sales volumes declined through late December, and organic sales only rose thanks to a double-digit spike in prices. While it's good news that Pepsi could pass along higher prices to consumers, its declining volumes suggest there are limits to that strategy.
Investors will want to see a better balance between price and volume growth when Pepsi announces first-quarter results on April 25. But the company is still highly likely to boost sales in 2023 on top of two consecutive years of above-average gains.
Margin trends
PepsiCo lost a step on the earnings front in 2022. Operating profit rose just 3% to trail the company's 9% reported revenue increase. Adjust for currency exchange rate swings, though, and the results look better. Pepsi's core operating profit margin fell by less than a percentage point in Q4, demonstrating the efficiency of its business. Management said in a conference call with investors that this success "highlights our diversified portfolio and the resilience of our categories ."
PEP Operating Margin (TTM) data by YCharts.
Investors have good reasons to expect this diversification to help protect momentum even through a further slowdown or recession. Most Wall Street pros are forecasting that core earnings will rise to about $7.25 per share in 2023 from $6.79 per share last year.
Dividends and value
Pepsi's stock isn't a screaming value today, but it isn't expensive either. Priced at about 3 times annual sales, its valuation is roughly in the middle of the range that investors have seen in the past three years.
But investors still might want to consider adding this dividend stock to their portfolio. PepsiCo isn't likely to see big earnings declines even through a mild recession. Its 2022 performance shows that it can lead the industry during the next spending upturn, too.
In the meantime, income investors can collect a dividend that yields over 2.5% today, along with steady cash returns from stock repurchase spending. Sure, Pepsi's 8% expected earnings increase this year is relatively modest.
Yet, the stock provides a nice balance between growth and income without exposing investors to too much risk. That combination of factors is valuable in any market, but especially in today's uncertain economic environment.
