Despite facing inflationary pressures, global food and beverage giant PepsiCo, Inc. (PEP - Get Rating) reported better-than-expected second-quarter 2022 results. Core EPS of $1.86 beat the consensus estimate by 7.1%, while its revenue came in at $20.23 billion, surpassing the consensus estimate by 3.7%.

However, PEP’s margins took a hit due to the higher freight and commodity costs. PEP’s Chief Financial Officer Hugh Johnston said, “We are facing inflation like everyone else, and we think that is going to persist for a while, but we are taking enough pricing to be able to manage the inflation, and our focus is really much more on how do we drive costs out of the business.”

Amid surging costs, companies are downsizing their products to protect their margins, giving rise to shrinkflation. PEP expects costs to rise even further this year and has planned to control costs using “mix and assortment solutions,” including downsizing.

Apart from rising costs, PEP was hit hard due to the war between Russia and Ukraine as it had suspended the sale of its soft drinks and global beverage brands in Russia. Despite the challenges, the company revised its organic revenue growth for fiscal 2022 from 8% to 10%. Also, it expects its core constant currency EPS for fiscal 2022 to increase 8% year-over-year.

While PEP’s shares have gained marginally since the earnings release, they have lost 2.1% year-to-date to close the last trading session at $170.06. However, the stock surged 8.3% over the past month.

Here’s what could influence the performance of PEP in the upcoming months:

Mixed Financials

PEP’s net revenue increased 5.2% year-over-year to $20.22 billion for the second quarter ended June 11, 2022. The company’s gross profit increased 4.5% year-over-year to $10.81 billion. However, its net income declined 39.4% year-over-year to $1.43 billion.

Favorable Analyst Estimates

PEP’s revenues for fiscal 2022 and 2023 are expected to increase 5.1% and 3.6% year-over-year to $83.56 billion and 86.60 billion, respectively. Its EPS for fiscal 2022 and 2023 are expected to increase 6.5% and 8.3% year-over-year to $6.67 and $7.23, respectively. It surpassed consensus EPS estimates in each of the trailing four quarters.

High Profitability

In terms of trailing-12-month EBIT margin, PEP’s 14.98% is 75.8% higher than the 8.52% industry average. Likewise, its 18.10% trailing-12-month EBITDA margin is 49% higher than the industry average of 12.14%.

Furthermore, the stock’s trailing-12-month ROCE, ROC, and ROA came in at 54.57%, 13.25%, and 9.92%, compared to the industry averages of 13.67%, 6.43%, and 4.74%, respectively.

Stretched Valuation

In terms of forward non-GAAP P/E, PEP’s 25.50x is 42.8% higher than the 17.85x industry average. Likewise, its 3.52x forward non-GAAP PEG is 36.8% higher than the 2.57x industry average. And the stock’s 11.95x forward P/B is 306.8% higher than the 2.94x industry average.

POWR Ratings Show Promise

PEP has an overall rating of B, which equates to a Buy in our POWR Ratings system. The POWR Ratings are calculated by considering 118 different factors, each weighted to an optimal degree.

Our proprietary rating system also evaluates each stock based on eight distinct categories. PEP has a B grade for Quality, consistent with its 7.21% levered FCF margin, which is 112% higher than the industry average of 3.40%.

It has a B grade for Stability, in sync with its 0.57 beta.

PEP is ranked #10 out of 35 stocks in the A-rated Beverages industry. Click here to access PEP’s Growth, Value, Momentum, and Sentiment ratings.

Bottom Line

Despite facing rising commodity and freight costs, PEP reported impressive revenue and earnings in its last reported quarter. The company also increased its organic revenue and core EPS outlook for fiscal 2022. The stock is trading above its 50-day and 200-day moving average of $166.88 and $166.71, respectively, indicating an uptrend.

Given the favorable analyst estimates and higher profitability, it could be wise to buy the stock now.

How Does PepsiCo, Inc. (PEP) Stack Up Against its Peers?

PEP has an overall POWR Rating of B, equating to a Buy rating. You might want to consider investing in the following Beverages stocks with an A (Strong Buy) or B (Buy) rating: Primo Water Corporation (PRMW - Get Rating), Kirin Holdings Company, Limited (KNBWY - Get Rating), and Carlsberg A/S (CABGY - Get Rating).

PEP shares fell $0.56 (-0.33%) in premarket trading Wednesday. Year-to-date, PEP has declined -1.10%, versus a -16.95% rise in the benchmark S&P 500 index during the same period.

About the Author: Dipanjan Banchur

Since he was in grade school, Dipanjan was interested in the stock market. This led to him obtaining a master’s degree in Finance and Accounting. Currently, as an investment analyst and financial journalist, Dipanjan has a strong interest in reading and analyzing emerging trends in financial markets. More...

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