PepsiCo (PEP -0.62%) isn't making its excellent growth momentum a secret. The snack food and beverage giant recently hiked its sales and earnings outlook for the second straight time in 2023, after all, and revenue is on pace for another year of double-digit percentage gains.
Yet the stock is underperforming the S&P 500 so far in 2023, having risen just 3% through mid-July compared to the wider market's 18% spike. Wall Street has apparently decided that PepsiCo stock isn't worth the risk right now. But, while there are many factors pointing to great returns for patient owners of this stock, its improving financial picture is the clearest.
Let's take a closer look.
The bad news
Investors seem to be focused on PepsiCo's sales volume trends, which remain in negative territory. The company had to raise prices significantly to offset the 3% drop in volume in Q2. In a healthier selling environment, both prices and volumes would be rising, and at a balanced rate. Coca-Cola (KO), whose portfolio is entirely focused on beverages, achieved this positive result over the last few quarters.
Pepsi's management team still sees the business as being on strong footing when it comes to market share and competitive performance. "Our results are indicative of our strong performance in growing categories with expandable consumption occasions," CEO Ramon Laguarta said in a conference call with investors.
The green flag
The even better news is that the profitability picture is brightening. Pepsi spent more on advertising and marketing this past quarter, and yet profit margins expanded. Wins here allowed core earnings to rise 15%, easily outpacing the 10% boost in organic sales.
There are good reasons to expect further gains here ahead. Cost inflation, especially in areas like freight and raw materials, appears to be slowing down. Pepsi's latest price increases are boosting earnings, too. And demand is strong in high-margin niches like energy drinks, snacks, and sparkling waters. Shareholders have every reason to look for higher margins through late 2023 and beyond.
The Coca-Cola comparison
Even with the modest rebound, PepsiCo's profit margin remains far lower than Coke's. That's partly due to its split focus on snacks and beverages, and partly thanks to Coke's dominance in on-the-go drink sales as opposed to in-store purchases. Investors seeking highly profitable growth stocks might prefer Coke today, as its operating margin is sitting at over 27% of sales, or roughly double PepsiCo's level.
PEP Operating Margin (TTM) data by YCharts
But Pepsi stock still looks attractive, given its relatively cheap valuation. You can own shares for less than 3 times sales, compared to Coca-Cola's P/S ratio of over 6. Toss in the dividend yield of 2.7%, and you've got a recipe for strong returns over time.
Given Pepsi's strong and accelerating sales trends, it might not be long before sales volumes begin marching higher again. If costs remain under control, then shareholders might see even faster earnings gains than the 15% spike that occurred in the most recent quarter. There's no telling whether success like that will convince Wall Street to stop ignoring Pepsi's progress. But patient investors can simply hold the growth stock while they wait for sentiment to shift back to the positive side.
