PepsiCo (PEP)

Food and beverage company PepsiCo (NASDAQ:PEP) reported revenue ahead of Wall Street’s expectations in Q1 CY2025, but sales fell by 1.8% year on year to $17.92 billion. Its non-GAAP profit of $1.48 per share was 0.8% below 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 put up a good quarter or two, but many enduring ones grow for years.

With $91.52 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 there are only so many big store chains to sell into, making it harder to find incremental growth. To expand meaningfully, PepsiCo likely needs to tweak its prices, innovate with new products, or enter new markets.

As you can see below, PepsiCo’s sales grew at a tepid 4.2% 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’s revenue fell by 1.8% year on year to $17.92 billion but beat Wall Street’s estimates by 0.7%.

Looking ahead, sell-side analysts expect revenue to grow 1.1% over the next 12 months, a deceleration versus the last three years. This projection is underwhelming and suggests its products will face some demand challenges.

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 2.4%. 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 4.4% 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 Q1 2025, sales volumes dropped 2% year on year. This result represents a further deceleration from its historical levels, showing the business is struggling to move its 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 54.6% gross margin over the last two years. That means for every $100 in revenue, only $45.40 went towards paying for raw materials, production of goods, transportation, and distribution.

This quarter, PepsiCo’s gross profit margin was 55.8%, in line with the same quarter last year and analysts’ estimates. Zooming out, the company’s full-year margin has remained steady over the past 12 months, 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 profitability metric because it accounts for all expenses enabling a business to operate smoothly, including marketing and advertising, IT systems, wages, and other administrative costs.

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 13.5%. 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 might fluctuated slightly but has generally stayed the same 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 profit margin of 14.4%, in line with the same quarter last year. This indicates the company’s cost structure has recently been stable.

Revenue trends explain a company’s historical growth, but the change in earnings per share (EPS) points to the profitability of that growth – for example, a company could inflate its sales through excessive spending on advertising and promotions.

PepsiCo’s EPS grew at a decent 8.2% compounded annual growth rate over the last three years, higher than its 4.2% annualized revenue growth. However, this alone doesn’t tell us much about its business quality because its operating margin didn’t expand.

In Q1, PepsiCo reported EPS at $1.48, down from $1.61 in the same quarter last year. This print was close to analysts’ estimates. Over the next 12 months, Wall Street expects PepsiCo’s full-year EPS of $8.03 to grow 4%.

Although earnings are undoubtedly valuable for assessing company performance, we believe cash is king because 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 8.2% over the last two years, better than the broader consumer staples sector.

Taking a step back, we can see that PepsiCo’s margin was unchanged over the last year, showing it recently had a stable free cash flow profile.

PepsiCo burned through $1.58 billion of cash in Q1, equivalent to a negative 8.8% margin. The company’s cash burn slowed from $1.65 billion of lost cash in the same quarter last year. These numbers deviate from its longer-term margin, indicating it is a seasonal business that must build up inventory during certain quarters.

EPS and free cash flow tell us whether a company was profitable while growing its revenue. But was it capital-efficient? Enter ROIC, a metric showing how much operating profit a company generates relative to the money it has raised (debt and equity).

Although PepsiCo hasn’t been the highest-quality company lately, it historically found a few growth initiatives that worked. Its five-year average ROIC was 17.9%, higher than most consumer staples businesses.

PepsiCo reported $8.58 billion of cash and $48.52 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 $17.55 billion of EBITDA over the last 12 months, we view PepsiCo’s 2.3× net-debt-to-EBITDA ratio as safe. We also see its $954 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.

It was encouraging to see PepsiCo beat analysts’ organic revenue expectations this quarter. On the other hand, its EPS and EBITDA missed. Overall, this was a weaker quarter. The stock remained flat at $142.30 immediately after reporting.

Updated: July 9, 2025 at 10:42 PM EDT

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 isn’t a bad business, but we have other favorites. Although its revenue growth was a little slower over the last three years and analysts expect growth to slow over the next 12 months, its unparalleled brand awareness makes it a household name consumers consistently turn to. Be wary, however, as PepsiCo’s shrinking sales volumes suggest it’ll need to change its strategy to succeed.

PepsiCo’s P/E ratio based on the next 12 months is 16.1x. Beauty is in the eye of the beholder, but our analysis shows the upside isn’t great compared to the potential downside. We're pretty confident there are superior stocks to buy right now.

Wall Street analysts have a consensus one-year price target of $148.83 on the company (compared to the current share price of $134.60).