FEATURE PepsiCo offers all investors want: pricing power, upgrades and confidence

PepsiCo offers all investors want: pricing power, upgrades and confidence

Third quarter update demonstrated the company’s continuing ability to pass costs on to consumers

It’s the little luxuries in life that keep us going – a fizzy drink or packet of crisps is the comfort blanket which can get us through the stresses and strains of everyday life.

Little wonder then that PepsiCo (PEP:NYSE) continues to thrive despite the tricky consumer backdrop. PepsiCo doesn’t just own the eponymous soft drink, its roster of snack and beverage brands includes Walkers, Doritos, Mountain Dew and Quaker Oats.

A third quarter earnings update on 12 October revealed the pricing power which has stood it in good stead for much of 2022.

As the chart shows, every time PepsiCo shares have seen a significant drop this year, better-thanexpected quarterly earnings have helped repair the damage. As a result, PepsiCo is broadly flat on its levels at the start of the year versus a 23.5% fall for the S&P 500.

There is logic behind PepsiCo’s strong position. While cutting back on big-ticket items such as a new sofa when the economic backdrop is perilous is an obvious move, saving a few pounds or dollars by shunning a fizzy drink or a snack is not.

Brand loyalty is strong in this area, meaning even if prices go up, people are less likely to turn to a supermarket own-brand products or other cheaper alternatives. Pepsi is taking advantage of this fact.

There may be a limit to how many price increases shoppers will stomach, but for PepsiCo that limit has not been hit yet. Its sales for the quarter to 3 September were 8.8% higher year-onyear to $21.9 billion, versus $20.8 billion forecast by analysts. Adjusted earnings per share of $1.97 beat the $1.85 forecast.

PepsiCo now expects to deliver 12% organic sales growth for 2022, up from previous guidance of 10%, and has upgraded earnings per share growth guidance from 8% to 10%.

Management reiterated earlier guidance for total cash returns to shareholders of roughly $7.7 billion this year, comprised of $6.2 billion of dividends and $1.5 billion of share buybacks.

These are impressive numbers to be churning out given the cost-of-living pressures faced across the company’s markets and the impact of the strong dollar which shaved 3% from earnings growth in the quarter.

The company is pursuing further investment in brand innovation and marketing to help solidify and extend market share gains.

Chief executive Ramon Laguarta said: ‘On share – consistent with the trends that we saw last year and earlier this year, we’ve seen gains in, I would say, 70%, 75% in what we call foods, convenient foods, salty snacks. And we’re seeing about 70% gains in the beverage markets internationally.’

This is exactly the type of stock you should own in your portfolio now and for the long-term.

PepsiCo S&P 500

100

Jan 2022 Apr Jul Oct

Rebased to 100 Chart: Shares magazine • Source: Refinitiv

By Tom Sieber Deputy Editor