How High Could Pepsi Stock Go?

Persisting inflation has forced consumers to cut costs by either buying fewer products or switching to budget brands. That cost-consciousness has had a direct impact on retail sales, and immediate relief does not appear to be anywhere in sight.

The macroeconomic environment has posed a challenge for companies like Pepsico (NASDAQ: PEP), which are built on the strength of their brands. The food and beverage company’s massive portfolio includes Frito-Lay, Quaker Foods, and Gatorade in addition to its popular line of sodas.

As consumers have stretched their paychecks, Pepsi has felt the brunt of it. The stock was up roughly 6% in May, before a dramatic selloff erased those gains. Pepsi shares have now battled back but are only up by 1.7% year-to-date.

Though the company narrowly missed revenue estimates in its most recent earnings, Pepsi has continued its global expansion. It has also consistently beaten earnings estimates due to its well-established business model. Last but not least, Pepsi has continually paid a strong dividend.

With a mix or pluses and minuses to contend with, what does the future look like for Pepsi?

Why Did Pepsi Stock Go Up?

Since the company reported its Q2 earnings in July, Pepsi share have risen by 7.25%. That is in spite of the beverage maker’s revenue slightly underperforming revenue estimates.

The company’s second-quarter revenue of $22.5 billion was a 0.8% year-over-year improvement, but it lagged the estimated $22.57 billion that analysts had forecast.

On the earnings side, the food and beverage giant reported net income of $3.08 billion in the second quarter, up 12.2% from last year. Diluted earnings per share of $2.23 was 5.57% better than analysts expected.

One of the factors affecting Pepsi’s revenue underperformance was a massive recall by the company’s Quaker Foods brand. Revenue from Quaker Foods dropped 18% year-over-year in the quarter due to potential salmonella contamination in its cereals and snacks.

In addition, Frito-Lay’s North American volume dropped 4% in Q2 and Pepsi’s North American beverage volume decreased by 3% year-over-year. However, the company’s leadership said North American beverage volume increased from last quarter.

That improvement may well be due to management’s efforts to attract budget-conscious shoppers back to its brands. The company has launched several in-store promotions for brands like Cheetos and Doritos and it has leveraged its higher-margin products to attract frugal consumers.

Despite those efforts, Pepsi leadership lowered their revenue outlook for full year 2024. Pepsi now expects revenue growth of roughly 4%, which was previously at the lower range of the company’s expectations.

“When we’re saying at least 4%, we were talking more about around 5% in our minds,” said Pepsico CEO Ramon Laguarta on the earnings call. “Now we’re talking around 4%…it’s related specifically to the consumer in the U.S.”

Will Pepsi Stock Keep Going Up?

A revenue miss and reduced full-year guidance might not seem like the sort of news that would drive a stock price up, but it’s exactly what has happened.

Pepsi’s improvement since the earnings release is largely attributed to bright spots in the second quarter earnings release, such as the healthy global revenue growth figures reported. The company’s sales improved by 7% year-over-year in Latin America and by 2.5% in Europe.

One of Pepsi’s perennial strengths is that the company bottles its own beverages and produces the bulk of its food products in-house. That model is in stark contrast to competitor Coca-Cola, which outsources most of its production to third parties and earns revenue from royalties.

While there are risks involved with Pepsi’s model, it gives the company more control over its products and strong margins. That model is one of the main reasons Pepsi has beaten earnings estimates four quarters in a row.

How High Could Pepsi Stock Go?

Pepsi stock could rise to as high as $182.07 per share according to the 22 analysts who cover the beverage maker.

Though investors have bought back into Pepsi stock over the last few months, Wall Street is still on the fence as far Buy, Hold and Sell ratings are concerned.

Among analysts who have rated Pepsi, 12 rate it as a Hold and the upside is a modest 4.1% gain from where the stock currently trades.

There are still plenty of Pepsi bulls, though, with approximately half the analysts rating the stock as a buy, and 3 forecasting that Pepsi will outperform the market. The highest price target is $200 per share translates to a 14.3% increase over the next 12 months.

There is one Sell rating on the stock, and the lowest price target is $151 per share, corresponding to a 13.7% drop from where Pepsi now trades.

Is Pepsi Stock Undervalued?

After the past month’s gains, Pepsi has a price-to-earnings ratio of 25.53, which is marginally lower than Coke’s 26.32 P/E multiple.

Pepsi also has a lower price-to-sales multiple than its rival, coming in at 2.6x compared to Coke’s 6.4x ratio.

On the dividend front, Pepsi appears more attractive. If pays an annual dividend yield of 3.07%, amounting to a quarterly payout of $1.35 for PEP holders versus 2.78% yield for Coke, amounting to a $0.48 quarterly payout.

Is Pepsi Stock a Buy Or Sell?

Pepsi’s dedication to its dividend has been one of the most attractive aspects of the stock to shareholders. The company has consistently paid and raised its dividend for years.

Pepsi also has a broad stable of brands with well-established moats. While macroeconomic conditions will continue to linger and likely affect the company in the short term, Pepsi is likely to bounce back in the long run.

The company is undervalued compared to its arch-rival Coke on key metrics now and expects the revenue decline in its Quaker Foods brand to pick up in time. So too is the company making strides in Latin America and Europe.

All in all, Pepsi looks like a rock-solid stock that is still trading marginally below fair value. Add in the fact that Pepsi pays a strong dividend, and there are plenty of reasons to believe that Pepsi will reward its investors over the long haul.

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The author has no position in any of the stocks mentioned. Financhill has a disclosure policy. This post may contain affiliate links or links from our sponsors.