As 2023 draws to a close, many investors are probably reviewing their portfolios and weighing the pros and cons of holding on to certain positions or taking some gains off the table. Given the tech sector's generous returns this year, fueled by hype around artificial intelligence, some investors may be tempted to double down on these winners.
But it's important to remember that a well-diversified portfolio should include a broad range of stocks -- and one industry that has lagged the markets this year is food and beverage. With weight-loss drugs such as Ozempic, Wegovy, and Mounjaro rising in popularity, investor sentiment around food and beverage stocks has waned.
One company in particular looks appetizing despite its negative 7% return so far this year: PepsiCo (PEP -0.62%). Given its depressed pricing action, now looks like a great buying opportunity. Let's dig into what is fueling PepsiCo, what risk factors the company faces, and where the shares could be headed.
What's fueling PepsiCo?
Most people probably think of soda when it comes to PepsiCo. However, the company has a portfolio that reaches well beyond the beverage market. PepsiCo also owns a number of snacking brands, including Frito-Lay and Quaker Foods. But as health and wellness trends increase in popularity, coupled with the surging demand for weight-loss drugs, some investors may shy away from PepsiCo due to its core business of soda and snack foods.
While these are valid concerns on the surface, I am not worried about PepsiCo. The company has been around for a long time and is no stranger to shifts in consumer preferences. Moreover, for much of 2023, PepsiCo's snacking division has actually been the big winner -- possibly giving less credence to the argument revolving around the threat from obesity and diabetes medications.
For PepsiCo's Q3, ended Sept. 9, the company reported revenue growth of 7% and 5% in Frito-Lay and Quaker Foods, respectively. Moreover, the company's Latin America division grew 21% during Q3, which management attributed to "mostly our snack business."
Image source: Getty Images.
One thing worth pointing out is that part of the reason PepsiCo has witnessed this growth is inflation. While inflation cooled from 3.7% in September to 3.2% in October, food is one area in particular that continues to buck the trend. According to a November report from the Bureau of Labor Statistics, the food index increased 0.3% in October.
PepsiCo's management commented on this trend during the earnings call, stating that "there will be still a higher inflation in our businesses and therefore there will be higher price mix" compared to historical periods. Moreover, the company's CEO, Ramon Laguarta, suggested that 2024 "will have a bit more elevated price mix in the equation than in the previous years."
Given this dynamic, a contrarian investor may think that PepsiCo represents an undervalued and overlooked opportunity. In other words, given the company's superior brand equity and diverse portfolio of food and beverage products, PepsiCo can command pricing power and actually benefit from inflation.
Is PepsiCo stock a buy?
PEP PE Ratio (Forward) data by YCharts
PepsiCo currently trades at a forward price-to-earnings (P/E) multiple of 22. For reference, the estimate for the S&P 500 is 21.
PEP Total Return Level data by YCharts
Moreover, the chart above illustrates that the total return for PepsiCo stock over the last year has underperformed Coca-Cola and Mondelez International, and only narrowly outperformed Kraft Heinz. It's becoming more obvious that investors have fled PepsiCo stock and are looking for growth elsewhere. However, by zooming out, I'd say this position is a bit shortsighted.
First off, PepsiCo has earned the title of Dividend King given the long history of increasing its dividend. If anything, investors may want to give more thought to generating some passive income for their portfolios going into 2024. While some economists are calling for a bull market, the stats referenced above clearly show that inflation lingers well above the Federal Reserve's long-term target of 2% -- and food is one of the consistently higher categories. This theme underscores PepsiCo's strong snacking business and all signs are pointing to another solid performance next year.
PepsiCo appears to be in a rare position. It's actually a business that can benefit from inflation, and yet the stock has dropped like a rock. Moreover, investors clearly are not placing much of a premium on PepsiCo given its forward P/E level.
Investors looking to supplement their portfolio with some dividend income may be interested in shares of PepsiCo at this valuation. The company is outmaneuvering concerns about weight-loss drugs, the business is performing well, and yet the stock is lagging the broader market. Patient investors with a long-term mindset could use this as an opportunity to start dollar-cost averaging into a new position or lower their cost basis for existing shares.
