PepsiCo (PEP)

Food and beverage company PepsiCo (NASDAQ:PEP) met Wall Street’s revenue expectations in Q3 CY2025, with sales up 2.7% year on year to $23.94 billion. Its non-GAAP profit of $2.29 per share was 1.3% above analysts’ consensus estimates.

Company Overview

With a history that goes back more than a century, PepsiCo (NASDAQ:PEP) is a household name in food and beverages today and best known for its flagship soda.

These companies' performance is influenced by brand strength, marketing strategies, and shifts in consumer preferences. Changing consumption patterns are particularly relevant and can be seen in the rise of cannabis, craft beer, and vaping or the steady decline of soda and cigarettes. Companies that spend on innovation to meet consumers where they are with regards to trends can reap huge demand benefits while those who ignore trends can see stagnant volumes. Finally, with the advent of the social media, the cost of starting a brand from scratch is much lower, meaning that new entrants can chip away at the market shares of established players.

Competitors that offer beverages and snacks include Coca-Cola (NYSE:KO), Keurig Dr. Pepper (NASDAQ:KDP), Nestle (SWX:NESN), and Mondelez (NASDAQ:MDLZ).

A company’s long-term sales performance is one signal of its overall quality. Any business can have short-term success, but a top-tier one grows for years.

With $92.37 billion in revenue over the past 12 months, PepsiCo is one of the most widely recognized consumer staples companies. Its influence over consumers gives it negotiating leverage with distributors, enabling it to pick and choose where it sells its products (a luxury many don’t have). However, its scale is a double-edged sword because it’s harder to find incremental growth when your existing brands have penetrated most of the market. To accelerate sales, PepsiCo likely needs to optimize its pricing or lean into new products and international expansion.

As you can see below, PepsiCo’s sales grew at a sluggish 3.4% compounded annual growth rate over the last three years as consumers bought less of its products. We’ll explore what this means in the "Volume Growth" section.

This quarter, PepsiCo grew its revenue by 2.7% year on year, and its $23.94 billion of revenue was in line with Wall Street’s estimates.

Looking ahead, sell-side analysts expect revenue to grow 3.2% over the next 12 months, similar to its three-year rate. This projection doesn't excite us and suggests its newer products will not catalyze better top-line performance yet.

Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful staples business as there’s a ceiling to what consumers will pay for everyday goods; they can always trade down to non-branded products if the branded versions are too expensive.

To analyze whether PepsiCo generated its growth from changes in price or volume, we can compare its volume growth to its organic revenue growth, which excludes non-fundamental impacts on company financials like mergers and currency fluctuations.

Over the last two years, PepsiCo’s average quarterly sales volumes have shrunk by 2.3%. This decrease isn’t ideal as the quantity demanded for consumer staples products is typically stable. Luckily, PepsiCo was able to offset fewer customers purchasing its products by charging higher prices, enabling it to generate 2.1% average organic revenue growth. We hope the company can grow its volumes soon, however, as consistent price increases (on top of inflation) aren’t sustainable over the long term unless the business is really really special.

In PepsiCo’s Q3 2025, sales volumes dropped 3% year on year. This result represents a further deceleration from its historical levels, showing the business is struggling to move its products.

All else equal, we prefer higher gross margins because they make it easier to generate more operating profits and indicate that a company commands pricing power by offering more differentiated products.

PepsiCo has best-in-class unit economics for a consumer staples company, enabling it to invest in areas such as marketing and talent to grow its brand. As you can see below, it averaged an elite 54.5% gross margin over the last two years. That means for every $100 in revenue, only $45.45 went towards paying for raw materials, production of goods, transportation, and distribution.

In Q3, PepsiCo produced a 53.6% gross profit margin, down 2 percentage points year on year. On a wider time horizon, the company’s full-year margin has remained steady over the past four quarters, suggesting its input costs (such as raw materials and manufacturing expenses) have been stable and it isn’t under pressure to lower prices.

Operating margin is a key measure of profitability. Think of it as net income - the bottom line - excluding the impact of taxes and interest on debt, which are less connected to business fundamentals.

PepsiCo has managed its cost base well over the last two years. It demonstrated solid profitability for a consumer staples business, producing an average operating margin of 12.2%. This result isn’t surprising as its high gross margin gives it a favorable starting point.

Looking at the trend in its profitability, PepsiCo’s operating margin decreased by 2.4 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability.

This quarter, PepsiCo generated an operating margin profit margin of 14.9%, down 1.7 percentage points year on year. Since PepsiCo’s gross margin decreased more than its operating margin, we can assume its recent inefficiencies were driven more by weaker leverage on its cost of sales rather than increased marketing, and administrative overhead expenses.

We track the change in earnings per share (EPS) for the same reason as long-term revenue growth. Compared to revenue, however, EPS highlights whether a company’s growth is profitable.

In Q3, PepsiCo reported adjusted EPS of $2.29, down from $2.31 in the same quarter last year. Despite falling year on year, this print beat analysts’ estimates by 1.3%. Over the next 12 months, Wall Street expects PepsiCo’s full-year EPS of $7.85 to grow 7.7%.

If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.

PepsiCo has shown impressive cash profitability, driven by its attractive business model that gives it the option to reinvest or return capital to investors. The company’s free cash flow margin averaged 7.4% over the last two years, better than the broader consumer staples sector.

PepsiCo’s free cash flow clocked in at $3.48 billion in Q3, equivalent to a 14.5% margin. The company’s cash profitability regressed as it was 1.8 percentage points lower than in the same quarter last year, but it’s still above its two-year average. We wouldn’t read too much into this quarter’s decline because investment needs can be seasonal, leading to short-term swings. Long-term trends trump temporary fluctuations.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? A company’s ROIC explains this by showing how much operating profit it makes compared to the money it has raised (debt and equity).

Although PepsiCo hasn’t been the highest-quality company lately because of its poor top-line performance, it historically found a few growth initiatives that worked. Its five-year average ROIC was 17.4%, higher than most consumer staples businesses.

PepsiCo reported $8.66 billion of cash and $50.85 billion of debt on its balance sheet in the most recent quarter. As investors in high-quality companies, we primarily focus on two things: 1) that a company’s debt level isn’t too high and 2) that its interest payments are not excessively burdening the business.

With $17.3 billion of EBITDA over the last 12 months, we view PepsiCo’s 2.4× net-debt-to-EBITDA ratio as safe. We also see its $691.7 million of annual interest expenses as appropriate. The company’s profits give it plenty of breathing room, allowing it to continue investing in growth initiatives.

Organic revenue missed slightly, although total revenue ended up in line with expectations and EPS beat slightly. Overall, this was a mixed quarter. The stock remained flat at $139.94 immediately after reporting.

Updated: December 3, 2025 at 9:53 PM EST

The latest quarterly earnings matters, sure, but we actually think longer-term fundamentals and valuation matter more. Investors should consider all these pieces before deciding whether or not to invest in PepsiCo.

PepsiCo’s business quality ultimately falls short of our standards. To kick things off, its revenue growth was uninspiring over the last three years, and analysts don’t see anything changing over the next 12 months. And while its unparalleled brand awareness makes it a household name consumers consistently turn to, the downside is its shrinking sales volumes suggest it’ll need to change its strategy to succeed. On top of that, its declining operating margin shows the business has become less efficient.

PepsiCo’s P/E ratio based on the next 12 months is 17.4x. While this valuation is fair, the upside isn’t great compared to the potential downside. We're fairly confident there are better stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $153.91 on the company (compared to the current share price of $148.10).