Frito Redesign, SAP Rollout And Global Expansion Will Drive Progress

Key Takeaways

• Strategic focus on portfolio transformation and price strategies at Frito aims to drive revenue growth and increase consumer frequency.
  
• Expansion in high-growth international markets like India and Brazil is expected to be a key driver for revenue and profit growth.
  
• Tariffs and economic uncertainties are pressuring profit margins, with performance issues and regulatory costs posing additional challenges to PepsiCo's growth.

Catalysts

Engages in the manufacture, marketing, distribution, and sale of various beverages and convenient foods worldwide.

• PepsiCo is focusing on portfolio transformation and operational excellence within Frito, which includes improved price-pack architecture and increased entry price points expected to boost revenue growth and consumer frequency.
  
• The completion of SAP implementation at Frito is anticipated to enhance operational efficiency and execution, impacting net margins positively by improving service levels and cost management.
  
• PepsiCo's strategy to expand its international business, particularly in high-growth markets like India and Brazil, is expected to be a key revenue and profit growth driver.
  
• Plans to react to the increased operational complexities due to tariffs through mitigation strategies aim to sustain earnings, even as macroeconomic uncertainties pose challenges.
  
• The potential adaptation to evolving consumer demands for more natural ingredients could lead to better margin management by aligning product offerings with consumer preferences and regulatory requirements, impacting long-term earnings positively.

PepsiCo Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming PepsiCo's revenue will grow by 2.8% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.2% today to 12.3% in 3 years time.
• Analysts expect earnings to reach $12.2 billion (and earnings per share of $8.96) by about April 2028, up from $9.4 billion today. The analysts are largely in agreement about this estimate.
• In order for the above numbers to justify the analysts price target, the company would need to trade at a PE ratio of 20.2x on those 2028 earnings, up from 19.7x today. This future PE is lower than the current PE for the GB Beverage industry at 25.5x.
• Analysts expect the number of shares outstanding to decline by 0.27% per year for the next 3 years.
• To value all of this in today's terms, we will use a discount rate of 6.21%, as per the Simply Wall St company report.

PepsiCo Future Earnings Per Share Growth

Risks

• Tariffs are presenting new challenges and have resulted in a reduced full-year earnings outlook, impacting potential revenue and profitability.
  
• Heightened macroeconomic and consumer uncertainty, alongside a declining consumer confidence index, could put downward pressure on revenue growth and profit margins.
  
• The continued subdued performance of Frito-Lay in North America means that additional resources may need to be diverted into turning around its performance, potentially impacting net margins.
  
• Geographic risks such as a slowdown in China and economic connectivity between the U.S. and Mexico could lead to inconsistent revenue growth from international markets.
  
• The additional costs related to new legislation around ingredient and coloring changes could affect product profit margins if not mitigated properly.

Valuation

• The analysts have a consensus price target of $151.55 for PepsiCo based on their expectations of its future earnings growth, profit margins and other risk factors. However, there is a degree of disagreement amongst analysts, with the most bullish reporting a price target of $170.0, and the most bearish reporting a price target of just $110.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $99.5 billion, earnings will come to $12.2 billion, and it would be trading on a PE ratio of 20.2x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $134.31, the analyst price target of $151.55 is 11.4% higher.
  
• We always encourage you to reach your own conclusions though. So sense check these analyst numbers against your own assumptions and expectations based on your understanding of the business and what you believe is probable.