PepsiCo, Inc. (NASDAQ: PEP) gave investors a sweet taste of the food and beverage giant’s financial health in their fourth-quarter earnings release. A beat in top-line and bottom-line estimates assured investors of the company’s resilience in navigating uncertain markets and retaining pricing power under undue circumstances. With newfound momentum, investors will be wondering how high Pepsi can rise.
Total revenue for the fourth quarter of 2022 came to $28Bn, beating estimates of $26,8Bn comfortably, while earnings per share of $1,67 topped the $1,65 consensus. Organic sales rose by a staggering 14% to accompany the fruitful outlook given by management on the company’s outlook for the upcoming year. Pepsi’s share price is up 2,6% since the release and is currently trading at $176,20.
Pepsi’s share price has formed an upward trend in the last couple of months. However, the trend is moderate as the share price has followed the general direction of the consumer staples industry in forming a sideways-moving trend. Investors are worried about the level of growth these giant staple industries can realize. The expensive valuations prevent heavy bullish momentum from pushing the share price to quick and meaningful gains. However, investors with longer-term horizons can view companies like these as stable return drivers. The recent positive earnings release has pushed the price up to $176,20, ending the short consolidation that formed in anticipation of the results. An upward gap was closed in Thursday trading, inviting the bulls to push prices back up. Now, the resistance of $177,67 is in focus. A breakout above could force the higher resistance of $184,39 to be tested. If a breakout above higher resistance occurs, a continuation of the pattern may result in a move up to what is estimated to be the fair value of the stock at $194,69. However, price fails to break through resistance, more sideways movement is on the cards, driven by market sentiment as they await a further catalyst to spark more significant upside pressure.
Leading up to the earnings, there was a lot of focus on the company’s ability to maintain pricing power in conditions where demand pressures could strain the top line. Their results showed their ability to navigate high inflationary conditions and pass these costs onto consumers while retaining demand. The company’s management commented that despite price rises, consumers still view their products as affordable, creating a demand tailwind in the future compared to their competitors. This could be key in their 2023 operating results as higher inflation and commodity costs could still affect input costs, directly trickling down to the bottom line. Their snacks segment was also a significant driver in their final quarter, with revenues of $7,7Bn, beating the consensus of $7,19Bn. This segment is their second largest by revenue, and core operating profit from the division was 16%, showing vital signs of growth. Their largest segment, PepsiCo Beverages North America, generated $8,1Bn in revenue in the fourth quarter, up from $7,6Bn in the same quarter last year. Not only did they report substantial top-and-bottom line numbers, but their outlook for 2023 also sat well with investors. A forecast of 6% organic revenue growth beats the consensus of 5,08%, while 8% constant currency growth in earnings per share also surprised analysts. They further emphasized their commitment to rewarding their shareholders by announcing a 10% increase in their dividend policy as part of their $7,7Bn estimated cash return to shareholders for 2023. $1Bn of this portion will come in the form of share buybacks, with the rest being paid out in dividends. Management’s solid operational numbers and an optimistic outlook for the year ahead point to the further potential upside for Pepsi. However, tight monetary conditions and a possible economic downturn may continue to be a headwind for the company’s earnings, which have been growing slower than the general American market.
Further risks investors should be aware of is the high debt levels the company operates within a high interest-rate environment. Long-term debt of $35,66 Bn is not covered by its cash from operations of $ 10,81 Bn. This could take future cash flows away from shareholders and reinvestment towards repaying debt, which could cap potential growth upside if management does not carefully manage their balance sheet.
Pepsi impressed investors with its latest quarterly report and outlook for 2023. The company looks financially strong in its revenue-generating ability. They have also shown stability in navigating economic uncertainty. There could be a potential entry point for the long investor at $176,20 with a possible 11% price upside to an estimated fair value of $194,69.
Sources: Koyfin, TradingView, Yahoo Finance, Simply Wall Street, PepsiCo Inc.