PepsiCo (PEP 1.65%) stock has been a winner for shareholders over the past year. The consumer staples giant has overcome major cost pressures by boosting its prices. This strategy protected profit margins without sacrificing too much demand.
The beverage and snack food giant recently updated investors on its wider 2023 goals, lifting expectations for both sales and earnings. Let's take a look at whether the stock is still a buy following that first-quarter announcement.
Tasty treats
There were lots of reasons for investors to celebrate Pepsi's late-April sales update. Organic revenue was up 14%, or roughly on par with the blazing gains the company achieved in the full 2022 year.
Looking deeper into the headline figure reveals other encouraging signs. While overall sales volumes declined again, people generally accepted rising prices on snacks and beverages. PepsiCo reported a 3% volume drop in its food segment and a 1% uptick on the beverage side of the business. "We are very pleased with our performance and business momentum as our categories and geographies remained resilient," CEO Ramon Laguarta said in a press release.
Cash and profits
Investors finally started to see progress on the profitability front as well. While huge profit pressures continued into 2023 from factors like currency exchange rate shifts and spiking raw material costs, non-GAAP profitability rose. This uptick was a result of sustained price increase initiatives over the last few quarters, plus aggressive cost cutting.
Pepsi is in a strong financial position, too. Cash flow for the year is still projected to be high enough to fund about $8 billion of direct shareholder returns, mostly through dividend payments. Pepsi's June dividend payment will be 10% higher than last year's and will mark the company's 51st consecutive year of annual increases.
Looking ahead
The clearest sign of progress for the business is that Pepsi lifted its 2023 sales and earnings forecasts. After jumping 14% last year, organic sales are now expected to rise 8% this year, up from the previous forecast of 6% growth. Projected profit gains ticked up to 9% from 8% as well.
Investors might be disappointed that this updated outlook still translates into slightly weaker profit margins. Pepsi's business continues to be pressured by soaring costs for things like cooking oil and cereal grains, with price increases lagging these spikes.
PEP Operating Margin (TTM) data by YCharts
But its pricing and volume trends suggest that Pepsi can pass along these higher prices over time. Meanwhile, the stock looks reasonably priced at about 3 times annual sales. Sure, that price-to-sales valuation was closer to 2.6 at various times over the last several years. But Pepsi is still valued below peers like McCormick.
The main piece missing from PepsiCo's bullish thesis is a stronger profit margin, and some investors will prefer to wait for clearer evidence of a rebound here before buying the stock. Taking on a bit more risk now might deliver better returns, since Pepsi seems to be right on track to post another strong sales result in 2023, followed by accelerating earnings growth over the next few years.
