A combination of steady growth, climbing profitability, and a solid balance sheet makes for a great setup when considering a stock as a potential investment opportunity. Consumer-staples sector leader PepsiCo (PEP +0.67%) checks off those boxes.
On the other hand, the recent trading action hasn't been very inspiring. Shares of PepsiCo are down 10% from their 52-week high, underperforming the S&P 500 in 2024. While this type of volatility can sometimes warrant caution, it's important to stay focused on the big picture, which remains positive.
Here's why I believe PepsiCo is a buy and well-positioned to rebound into the second half of the year.
NASDAQ: PEP
Key Data Points
Strength through global diversification
The attraction of PepsiCo starts with the company's globally recognized beverages and snacks-brand portfolio sold in more than 200 countries. That diversification across several product categories and regions has helped the company navigate a challenging macro-economic backdrop in recent years and balance some mixed trends to start 2024.
In the first quarter (ended March 23), PepsiCo reported 2.7% year-over-year organic-revenue growth. While volumes in North America were down slightly compared to the period last year, gains in international markets coupled with a higher-pricing mix have maintained growth. Company efforts to control costs and generate financial efficiencies led to a core constant currency earnings-per-share (EPS) increase of 7% compared to Q1 2023.
The headline numbers are fine, but in the context of even stronger growth and earnings momentum in the first half of last year leaving the appearance of a slowdown.
Management has cited some weakness in demand from "lower income consumers" most pressured by the effects of lingering inflation and high interest rates in the U.S. Market uncertainty toward this customer category may help explain why the stock has struggled to gain traction this year thus far.
Nevertheless, management reaffirmed full-year guidance. PepsiCo is forecasting 2024 organic-revenue growth of at least 4% and at least 8% higher core constant current EPS compared to 2023.
Image source: Getty Images.
Shares of PepsiCo may be undervalued
While it hasn't been a straight line higher, the recent results from PepsiCo suggest ongoing success for the company's "Stronger, Better, Faster" motto that has been in place as a long-term vision since 2019. The company sees a significant opportunity to accelerate growth, particularly in international markets where packaged foods and beverages are still underpenetrated.
Part of the strategy centers on product innovation covering new flavors and distribution channels, focusing the portfolio on areas of more profitable growth. Pepsico continues to invest in expanding automation and digitalization within its world-class logistics network to ultimately deliver structurally higher margins. These factors can generate a tailwind for the stock over the next decade and beyond.
Maybe the most compelling metric when looking at PepsiCo right now is its current valuation following the recent sell-off. The stock is currently trading at a forward price-to-earnings (P/E) ratio of 20.4 against the implied management target for EPS above $8.23 this year. Notably, this level marks a 24% discount compared to the 5-year average for the multiple of 26.7.
My interpretation here is that shares of PepsiCo are simply undervalued, considering an outlook for stronger growth and earnings momentum going forward.
PEP PE Ratio (Forward) data by YCharts.
I can also point to PepsiCo's current dividend yield at 3%, or 3.2% on a forward basis, which is above the stock's average over the past decade at 2.8%. It's worth mentioning that PepsiCo has extended its legacy as a Dividend King, marking its 52nd consecutive year of dividend growth, hiking the quarterly payout to $1.355 per share this year.
PEP Dividend Yield data by YCharts.
Deciding on PepsiCo stock
There's a lot to like about PepsiCo, which could be a good addition to your portfolio. The upside for the stock includes a scenario where demand and volume trends in North America begin to rebound as a catalyst for earnings to outperform expectations into 2025 and beyond. As long as global economic conditions remain resilient, I'll stay bullish on its shares.
