PepsiCo, Inc. (NASDAQ: PEP)
PepsiCo is the largest food and beverage company in North America and the second-largest in the world, behind only Nestlé. PepsiCo's products include a wide range of household-name food and beverage brands, including Pepsi, Gatorade, Frito-Lay, Quaker Oats, Rockstar Energy, and Muscle Milk. Having recently released a glowing Q3 report, the company has seen an increase in mentions by a huge 116% over the last day, prompting investors to wonder what makes the stock gain so much hype. Currently, shares of PepsiCo trade at $173.90 each.
Positive Hype
The company recently reported accelerating revenue and earnings growth, gushing cash flow, and healthy sales volumes, all of which are reasons for its recent hype too. Let’s look at these and some others.
PepsiCo reported a 9% year-over-year sales to increase through early September, but that figure understates its blazing momentum. After adjusting for currency exchange rate shifts and divested products, organic sales rose 16% in the third quarter. That result represents an acceleration over the 13% rate that investors initially predicted, beating estimates.
For 2021, revenue rose 12.9% year over year to $79.4 billion, while operating income increased 10.7% year over year to $11.2 billion. Net income edged up 7% year over year to $7.6 billion and PepsiCo also generated healthy free cash flow of $7 billion and $6.4 billion in 2021 and 2020, respectively.
The momentum carried over into the first nine months of 2022, with revenue increasing 7.7% year over year to $58.4 billion. PepsiCo's free cash flow generation remains robust, with $3.7 billion churned out during the first three quarters of 2022.
Operating and net income rose 4.4% and 6% year over year to $9 billion and $6.7 billion, respectively, after adjusting for an exceptional gain and impairment loss in the nine-month period.
The gross profit margin held steady, and the operating profit margin expanded at a time when many peers are reporting declines. That success adds weight to management's claim that PepsiCo's dominant industry position allows it to maintain unusually high profits.
Additionally, the company's famous brand names and resilient food-and-drink business enabled it to increase its quarterly dividend by 7% year over year to $1.15 per share.
Management also raised its 2022 outlook thanks to strong overall results through early September. It also now sees organic revenue rising by 12% compared to the prior 10% goal.
Negative Hype
Although PepsiCo. has recently seen lots of success in terms of performance, there are still some reasons it might not be the best time to invest in the company. Here are two of them.
During PepsiCo's third-quarter conference call, CEO Ramon Laguarta said the retail environment was still "very inflationary with a lot of supply chain challenges," but that it was stretching its brands to "higher price points and consumers are following us." Although this may take a toll on PepsiCo., the company has always proved resilient.
PepsiCo's stock isn't cheap relative to its industry peers or its long-term growth rates. It trades at 23 times forward earnings and this high valuation reflects its popularity as a safe-haven stock over the past year, but it could also limit its near-term gains over the next few quarters.
Conclusion
The metrics and numbers above all indicate PepsiCo is well-insulated from inflation and other macro headwinds. That's why PepsiCo's stock has risen 8% over the past 12 months as the S&P 500 has declined 17%. Add in a dividend that is almost certain to rise for its 51st consecutive year in 2023, and you've got the ingredients you need for strong stock returns.
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The algorithm for our proprietary HypeIndex score is based on sentiment analysis, data science and machine learning.
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