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PepsiCo Inc. (PEP) is a well-managed company with a valuable brand portfolio, and it continues to generate solid growth amid weak demand for many consumer staples, asserts John Staszak, an analyst with Argus Research, a leading independent Wall Street research firm.

On average, 11 of the 15 top-selling products in convenience stores come from PepsiCo, and Lay’s is the world’s best-selling snack food brand, having expanded sales from $100 million fifty years ago to $30 billion today.

Despite fewer orders from restaurants, theaters, and stadiums, we expect cost cutting to continue to benefit earnings, and we look for PepsiCo to achieve its goal of $1 billion in annual cost savings and productivity gains through 2023. Initiatives include optimizing the company’s global manufacturing footprint and re-engineering its distribution network.

In 2022, PepsiCo shares have risen 5%, compared to a 16% loss for the S&P 500. Given the company’s innovative products and pricing power, we think that the shares can move higher.

On Oct. 12, PepsiCo reported Q3'22 revenue of just under $22.0 billion, up 9% from Q3'21 and above the consensus estimate of $20.8 billion. Organic revenue rose an above-consensus 16%.

In its Q3 earnings release, management revised its 2022 guidance. The company projects full-year organic revenue growth of 12% (up from a prior 10%) and 10% EPS growth (up from 8%). It continues to expect $7.7 billion in cash returns to shareholders, consisting of $6.2 billion in dividends and $1.5 billion in share buybacks. It looks for core earnings to increase to $6.73 per share, up from a prior $6.63 and from $6.25 in 2021.

We believe that PEP shares are undervalued at 24.4-times our 2023 EPS estimate, below the five-year historical average and near the average of 24.5 for other large beverage companies. The price/sales ratio is 3.0, in line with the five-year average, and the price/free cash flow ratio is 23.2, slightly above the five-year average of 22.9.

We think that prospects for additional dividend hikes, share buybacks, and strong earnings warrant a higher valuation. Our revised target price of $206, combined with the dividend, implies a potential total return of 15% from recent levels.

About the Author

John Staszak's specialty at Argus includes the gaming, lodging, and restaurant groups within the consumer discretionary sector. Mr. Staszak earned an MBA from the University of Texas and a BA in economics from the University of Pennsylvania. In the financial services industry, he has worked as an analyst and consultant for firms including Standard & Poor's, the Bank of New York, Harris Nesbitt Gerard, and Merrill Lynch.

Mr. Staszak is a CFA charterholder. Forbes magazine named him as the second-best stock picker among restaurant analysts in 2006. He was also ranked the second-best analyst covering the restaurant sector by The Wall Street Journal in 2007, a year in which a Financial Times/StarMine survey also ranked him that same way.

In 2008, the Journal again listed Mr. Staszak as an award winner, with a third-best designation among hotel industry analysts and a fifth-best designation among restaurant analysts.

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