Investments In Frito Business And International Expansion Will Boost Future Prospects

Key Takeaways

• Strategic reinvestments and innovation in Frito are expected to drive growth by capturing new markets and optimizing pricing strategies.
  
• Systematic productivity programs and global expansion efforts anticipate improving margins, expanding revenue, and delivering substantial growth potential internationally.
  
• Inefficient capital allocation, economic volatility, and pricing sensitivity pose risks to PepsiCo's revenue growth, margins, and operational stability despite international growth efforts.

Catalysts

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

• PepsiCo is investing in strategic reinvestments in its Frito business to address the slowdown in category volume, specifically aiming to innovate and capture new spaces, which is expected to positively impact future revenue growth.
  
• For Away-From-Home consumption, PepsiCo identifies a significant opportunity to drive growth by introducing more products in the food business, which is expected to expand revenue and improve net margins.
  
• The company anticipates leveraging systematic productivity programs, such as automation and digitalization, which are likely to improve net margins by reducing operational costs and increasing efficiency.
  
• PepsiCo's strategy includes exploring underpenetrated price partitions in its Frito business, expected to drive top-line growth by meeting diverse consumer budget constraints, ultimately impacting revenue and potentially improving net margins through optimized pricing strategies.
  
• Internationally, PepsiCo sees continued growth potential with its focus on expanding its franchise beverage operations alongside food operations, expected to deliver substantial revenue and profit growth while providing flexibility in investment strategies for North America.

PepsiCo Future Earnings and Revenue Growth

Assumptions

• Analysts are assuming PepsiCo's revenue will grow by 2.5% annually over the next 3 years.
• Analysts assume that profit margins will increase from 10.4% today to 12.8% in 3 years time.
• Analysts expect earnings to reach $12.7 billion (and earnings per share of $9.15) by about March 2028, up from $9.6 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 21.2x on those 2028 earnings, down from 22.1x today. This future PE is lower than the current PE for the GB Beverage industry at 28.9x.
• Analysts expect the number of shares outstanding to decline by 0.24% 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

• The recent reinvestment in the Frito business using nonoperating gains did not yield immediate positive results, with volumes declining. This could indicate inefficiencies in capital allocation, potentially impacting revenue growth and profit margins.
  
• The company's guidance suggests less operating leverage on EPS for the coming year compared to prior years, implying that increased investment levels might be necessary due to higher operational costs or slower top-line growth, potentially impacting net margins.
  
• There seems to be considerable concern about consumer sensitivity to pricing, possibly affecting volume growth if not managed carefully. This could impact revenue if consumers shift to competitively priced alternatives, particularly in the Frito segment.
  
• Economic volatility, particularly in the geopolitical and policy realms, poses risks to the stability of PepsiCo's operational and financial outlook. These macroeconomic factors could influence revenue predictability and currency exchange impacts on earnings.
  
• The restructuring and realignment efforts, while aimed at capturing international growth, might indicate potential execution risks or inefficiencies in current organizational structures. These could affect both the revenue and profit margins if not managed effectively.

Valuation

• The analysts have a consensus price target of $164.369 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 $185.0, and the most bearish reporting a price target of just $124.0.
  
• In order for you to agree with the analyst's consensus, you'd need to believe that by 2028, revenues will be $99.0 billion, earnings will come to $12.7 billion, and it would be trading on a PE ratio of 21.2x, assuming you use a discount rate of 6.2%.
  
• Given the current share price of $154.44, the analyst price target of $164.37 is 6.0% higher. The relatively low difference between the current share price and the analyst consensus price target indicates that they believe on average, the company is fairly priced.
  
• 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.