Investors might be looking at a great opportunity to buy PepsiCo (PEP -0.57%) stock on the cheap right now. The beverage and snack giant has not participated in the 2023 rally so far, and shares remain about where they were when the year began.
That underperformance has come even though Pepsi has announced strong sales and earnings trends in recent quarters. Management even raised its 2023 outlook in late April after demand held up across its packaged foods portfolio.
With that big picture in mind, let's look at a few reasons why investors should consider buying this stock.
1. It's a growth business
Many consumer-focused companies today are posting weak sales results that reflect rising prices but falling volumes. Yet PepsiCo's results demonstrate how it is in an unusually strong growth position. Sure, sales volumes fell 3% in its food business. But beverage volumes were up in Q1. Overall organic sales jumped a blazing 14% on top of big gains a year ago.
Contrast that with another food-related company like McCormick, which is growing at a roughly 10% rate right now, and it's clear that Pepsi is winning market share in a tougher selling environment. "We are very pleased with our performance and business momentum," CEO Ramon Laguarta told investors in late April.
2. Profits are rising
Management also boosted its earnings outlook in May, and executives now see profits rising by 9% this year compared to the prior goal of an 8% increase. This upgrade reflects pricing power and success at launching innovative products in niches like sparkling water and energy drinks. Pepsi is also doing well at cutting costs, likely laying the foundation for an earnings spike ahead once the next cyclical upturn starts.
PEP Operating Margin (TTM) data by YCharts
The picture isn't as bright around profits, though, given that PepsiCo's margins have contracted since 2021 and are down around 13% of sales right now. Investors who are seeking higher earnings potential might consider Coca-Cola stock. The beverage giant routinely converts nearly 30% of sales into operating profit, after all.
3. The price is right
Still, PepsiCo stock looks compelling at today's prices. Its shares are valued at less than 3 times annual revenue, compared to McCormick's price-to-sales multiple of nearly 4 and Coca-Cola's ratio of 6. Those valuation gaps might close over the next year or so as Pepsi maintains its market share lead and pushes profit margins higher. Rising prices and slowing cost inflation should all help in that regard.
If you're a growth-focused investor, you'll find more exciting stocks in this industry. Coca-Cola delivers much higher annual earnings, for example. But Pepsi provides a nice balance between growth and profit -- all at a lower valuation. Its dividend payment, which today yields over 2.7%, is a bonus of immediate income.
Set those steady dividend payments to automatically invest, and simply watch PepsiCo's stock steadily improve along with the company's sales and earnings picture. Looking back in a few years, you might be glad you did.
