PepsiCo: Much more than a soft drink company

PepsiCo is a global leader in the food and beverage industry, driven by a diverse brand portfolio, a strong distribution network, and continuous innovation. With significant opportunities in international expansion, a growing focus on healthier products, and increasing penetration in the away-from-home market, the company is well-positioned for long-term growth. However, risks such as rising competition, shifting consumer preferences, and potential product recalls remain. The question is: Should PepsiCo be part of your portfolio?

This is not a financial advice. I am not a financial advisor and I only do these post to do my own analysis and elaborate about my decisions, especially for my copiers and followers. If you consider investing in any of the ideas I present, you should do your own research or contact a professional financial advisor, as all investing comes with a risk of losing money. You are also more than welcome to copy me.

For full disclosure, I should start by mentioning that at the time of writing this analysis, I do not own any shares of PepsiCo. If you would like to view the stocks in my portfolio or copy my portfolio, you can do so on eToro. Instructions on how to do so can be found here. I don't own any stocks in PepsiCo's competitors either. Thus, I have no personal stake in PepsiCo. If you want to purchase shares or fractional shares of PepsiCo, you can do so through eToro. eToro is a highly user-friendly platform that allows you to get started on investing with as little as $50.

The Business

PepsiCo is a global leader in the food and beverage industry, operating a diversified portfolio of brands across snacks, beverages, and convenience foods. Formed in 1965 through the merger of Pepsi-Cola and Frito-Lay, the company has expanded into a powerhouse with a presence in over 200 countries. PepsiCo’s extensive brand portfolio includes market-leading names such as Lay’s, Doritos, Cheetos, Gatorade, Pepsi-Cola, Mountain Dew, Quaker, and SodaStream. The company’s revenue is split between its convenience foods segment, which contributed 58 percent of total revenue in 2024, and its beverage division, which accounted for 42 percent. PepsiCo’s extensive portfolio of brands ensures that its products are enjoyed by consumers more than one billion times a day worldwide. PepsiCo’s moat is built on its brand dominance, vast distribution network, and diversified product lineup. Its brands benefit from strong consumer, reinforcing its leadership across multiple categories. The company’s beverage division, which includes Pepsi, Mountain Dew, Gatorade, and Rockstar Energy, competes in the carbonated soft drink, sports drink, and energy drink markets, while its investment in Celsius (8,5 percent ownership) strengthens its position in the fast-growing functional beverage space. On the food side, Frito-Lay commands a leading share of the global savory snack market, leveraging its scale, distribution reach, and product innovation to sustain market leadership. Meanwhile, the Quaker Foods division adds further diversification with a strong presence in oats and cereals. PepsiCo’s vertically integrated supply chain and expansive global distribution create significant barriers to entry. The company utilizes a combination of direct-store-delivery, warehouse distribution, and third-party bottlers to ensure efficient logistics and widespread availability. Its ability to operate across multiple sales channels - including supermarkets, convenience stores, e-commerce, and foodservice - positions it well in an evolving retail landscape. This combination of scale, brand strength, and omnichannel reach ensures that PepsiCo remains one of the most dominant players in the global food and beverage industry.

Management

Ramon Laguarta has served as PepsiCo’s CEO since 2018, becoming the sixth CEO in the company’s history. He holds a bachelor's and master's degree in Business Administration from ESADE Business School in Barcelona, along with a master's degree in International Management from Thunderbird School of Global Management at Arizona State University. Having joined PepsiCo in 1996, he has held various leadership roles, including CEO of the Europe and Sub-Saharan Africa sector, President of the Eastern Europe region, and Vice President of PepsiCo Europe. In 2017, he became the global president of the company before assuming the CEO role. Ramon Laguarta is widely recognized for his deep understanding of PepsiCo’s business, strong work ethic, and ability to drive long-term growth. Under his leadership, the company has embraced a strategic framework centered around being faster, stronger, and better. His vision is to position PepsiCo as the global leader in convenient foods and beverages by enhancing market responsiveness through a consumer-centric approach and increasing investments in top-line growth, optimizing costs, capabilities, and culture while unifying PepsiCo’s global operations, and embedding purpose into the business strategy by strengthening sustainability efforts, advancing technology, and prioritizing people and the planet. He has also introduced the mission to “create more smiles with every sip and every bite,” reflecting his commitment to innovation, sustainability, and long-term value creation. For shareholders, this translates to a focus on delivering sustainable top-tier total shareholder return while maintaining best-in-class corporate governance. According to Comparably, Laguarta holds a CEO rating of 72/100, placing him in the top 30% of companies of similar size. His extensive experience, strategic vision, and ability to adapt PepsiCo to evolving consumer trends give me strong confidence in the company’s management.

The Numbers

The first number we will look into is the return on invested capital, also known as ROIC. We require a 10-year history with all figures exceeding 10% for each year. PepsiCo has successfully delivered a ROIC above 10% every year for the past decade, which is a strong indicator of the company’s ability to generate attractive returns on its investments. Notably, despite the challenges posed by the pandemic in 2020 and 2021, PepsiCo maintained a relatively high ROIC, demonstrating its resilience. The same applies to the macroeconomic headwinds of 2022 and 2023, further underscoring the company’s ability to navigate difficult environments while sustaining strong returns. It is also worth highlighting that PepsiCo achieved its second-highest ROIC of the past decade in 2024, reinforcing the strength of its business model. Management has expressed a commitment to attracting consumers back to its product categories through investments that promise strong returns, which aligns with its focus on increasing ROIC over time. This proactive approach signals that PepsiCo is actively working to enhance its ROIC and sustain long-term value creation.

The following numbers represent the book value + dividend. In my previous format, this was referred to as the equity growth rate. It was the most important of the four growth rates I used in my analyses, which is why I will continue to use it in the future. As you are accustomed to seeing numbers in percentage form, I have decided to provide both the actual numbers and the year-over-year percentage growth. The numbers have fluctuated over the years, largely due to the company’s acquisitions and divestitures. For example, PepsiCo acquired Rockstar Energy in 2020 and sold Tropicana in 2021, both of which had a direct impact on the reported figures. Despite these variations, it is encouraging to see that PepsiCo has achieved its highest equity levels in the past three years. This upward trend reflects the company’s ability to generate shareholder value, and I look forward to seeing whether it continues in the coming years.

Finally, we will analyze the free cash flow. Free cash flow, in short, refers to the cash that a company generates after covering its operating expenses and capital expenditures. Levered free cash flow margin is used because I believe that margins provide a better understanding. Free cash flow yield refers to the amount of free cash flow per share that a company is expected to generate in relation to its market value per share. It is not surprising that PepsiCo has generated positive free cash flow every year over the past decade. While free cash flow declined slightly in 2024 compared to 2023, it still reached its fourth-highest level in the past ten years. The primary driver of this decline was increased operating costs and inflationary pressures, which also impacted the levered free cash flow margin, now at its second-lowest point in the past decade. Management has emphasized its focus on strengthening operations through more effective cash management and ongoing productivity initiatives. By eliminating duplications between business units, streamlining operations, and leveraging shared infrastructure, PepsiCo aims to enhance efficiency and improve cash flow generation. As free cash flow grows, shareholders should benefit as the company remains committed to returning capital through dividends and buybacks. Notably, the free cash flow yield is at its highest level since 2018, suggesting that PepsiCo is trading at a more attractive valuation than it has in many years. However, we will revisit valuation later in the analysis.

Debt

Another important aspect to consider is the level of debt. It is crucial to determine whether a business has manageable debt that can be repaid within a period of three years. We do this by dividing total long-term debt by earnings. Upon calculating for PepsiCo, I found that the company's debt is equivalent to 3,89 years' worth of earnings, exceeding the recommended level. One reason for the higher debt level is that PepsiCo took on additional debt to finance acquisitions, specifically Siete Foods and the 50% stake in Sabra that it did not previously own. However, this is not a deal-breaker for me, as PepsiCo is a well-established company with a strong financial foundation. I remain confident in its stability, though I believe the debt level should be monitored moving forward.

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Risks

Competition poses a significant risk to PepsiCo, particularly as private label brands gain traction and retailers push back against pricing, directly impacting market share, revenue growth, and profitability. PepsiCo operates in a highly competitive landscape, facing direct competition from global giants like The Coca-Cola Company, Nestlé, Mondelez, and Kraft Heinz, as well as regional and local manufacturers. While PepsiCo has maintained strong brand recognition and consumer loyalty, rising competition from private label brands presents a growing threat, especially in economic downturns when consumers seek lower-cost alternatives. Private label manufacturers could erode PepsiCo’s market share, particularly in a recessionary environment, as budget-conscious consumers opt for cheaper alternatives. This is especially relevant in snacks and beverages, where store brands have improved in quality and gained shelf space at major retailers. As a result, PepsiCo may be forced into aggressive pricing strategies, putting pressure on margins and limiting its pricing power. Retailer pushback on price increases further amplifies the competitive risk, as seen with Carrefour's recent decision to remove PepsiCo products from its shelves in parts of Europe due to what it described as “unacceptable price increases.” Losing shelf space at major retailers not only impacts near-term sales but also weakens brand visibility, creating opportunities for competitors to capture market share. If similar disputes arise with other major retailers, PepsiCo could face broader distribution challenges.

Reduced future demand for PepsiCo’s products poses a significant risk, as shifting consumer preferences, health trends, and external factors could weaken sales growth and profitability over time. Consumer preferences are constantly evolving due to demographic changes, lifestyle shifts, and growing health consciousness. A key concern is the increasing focus on health and wellness, which has led to reduced consumption of certain food and beverage categories, particularly those perceived as unhealthy. While PepsiCo has responded by expanding its portfolio of low-sugar and zero-sugar beverages, adapting its convenience foods segment to meet these changing preferences presents a greater challenge. The rise of GLP-1 obesity drugs introduces additional uncertainty. While management has stated that the current adoption levels of these drugs have had little direct impact on sales, they acknowledge a broader shift in consumer awareness around health and wellness, which could influence long-term demand. Studies, such as those from Numerator Cornell, suggest that salty snacks may be particularly affected by increased GLP-1 usage, though PepsiCo has yet to see a measurable impact. However, if adoption of these drugs accelerates, it could lead to a structural decline in demand for high-calorie and processed snack foods, requiring PepsiCo to adjust its product strategy accordingly.

Product recalls pose a significant risk to PepsiCo, as they can lead to direct financial losses, operational disruptions, and long-term reputational damage. A recall typically results in immediate costs related to product removal, disposal, and regulatory compliance, as well as potential fines, legal expenses, and lost sales from product unavailability. For example, in December 2023, PepsiCo had to recall certain Quaker granola bars and cereals due to potential Salmonella contamination, illustrating the financial and operational consequences of such incidents. Beyond the immediate impact, product recalls can also erode consumer confidence in PepsiCo’s brands. A single recall may lead consumers to question the safety and quality of a broader range of the company’s products, even those unrelated to the issue. This loss of trust can reduce demand, particularly if the recall involves a well-known brand or a category with heightened consumer sensitivity, such as snacks and cereals. Additionally, regulatory scrutiny may increase following a recall, leading to more frequent inspections and stricter compliance requirements, which could add costs and operational complexities for PepsiCo’s manufacturing and supply chain. Compounding the risk, PepsiCo’s joint ventures are also subject to product recalls, meaning the company could face indirect exposure to quality or safety issues beyond its direct control. Moreover, while PepsiCo maintains insurance to mitigate some of the financial losses from recalls, coverage may not fully offset the costs or compensate for reputational damage. If product quality concerns become recurring issues, they could significantly affect consumer perception, retailer relationships, and overall business performance.

Reasons to invest

International growth is a compelling reason to invest in PepsiCo, as the company’s expanding global footprint presents a significant opportunity for both revenue growth and margin expansion. Management has emphasized that international markets represent PepsiCo’s most exciting growth opportunity, with its international business alone now generating nearly $40 billion in revenue - larger than many standalone consumer goods companies. As PepsiCo scales its international operations, some markets are becoming more profitable, initiating a cycle of scale, reinvestment, and margin expansion. This allows the company to leverage efficiencies, reinvest in growth, and further strengthen its profitability over time. Management has noted that margin expansion in international markets has been particularly strong in recent years, underscoring the potential for continued earnings growth. The company’s ability to execute well in complex international markets, including those with large retailers and challenging cost structures, has been a key driver of success. PepsiCo has demonstrated resilience in European markets and continues to see strong growth potential, particularly as it works to increase per capita consumption in underpenetrated regions. With international markets now serving as a major contributor to both revenue and profitability, PepsiCo’s global expansion provides long-term growth potential. The combination of scalability, improving margins, and strategic market execution positions international growth as a key driver of value creation for shareholders in the years ahead.

A healthier portfolio is a compelling reason to invest in PepsiCo, as the company is actively aligning its product offerings with evolving consumer preferences for better-for-you snacks and beverages. With health and wellness awareness continuing to rise, particularly in developed markets like the U.S. and Europe, PepsiCo is well-positioned to capture shifting demand through a multi-faceted strategy focused on portion control, ingredient improvements, and functional nutrition. Portion control remains a core strategy, allowing consumers to enjoy their favorite snacks in smaller, more controlled servings. PepsiCo sees this as essential to maintaining relevance in its core categories while addressing consumer concerns about sodium, fat, and artificial ingredients. In addition, the company has improved its product formulations by introducing snacks with lower sodium, reduced fat, and more plant-based ingredients. Brands such as SunChips, Stacy’s, and Quaker have incorporated whole grains, legumes, and protein to meet the growing demand for functional benefits in snacks. PepsiCo’s advanced R&D capabilities continue to drive innovation in this space, ensuring that healthier product options are available across multiple categories and price points. On the beverage side, functional hydration and protein-enriched drinks are key growth areas. PepsiCo is leveraging brands like Gatorade, Propel, and Muscle Milk to expand into protein beverages and hydration-plus-protein solutions, capitalizing on a segment growing faster than the broader liquid refreshment beverage category. The company is also accelerating innovation in zero-sugar beverages, focusing on categories where it has strong market leadership, such as teas and coffees. Retailers have been supportive of PepsiCo’s strategy, allocating more shelf space to its healthier offerings, which enhances visibility and drives sales. As PepsiCo continues to evolve its portfolio toward more health-conscious options, its ability to meet changing consumer preferences should contribute to sustained growth and long-term market leadership.

Entering the away-from-home market is a compelling reason to invest in PepsiCo, as it represents a large, underdeveloped growth opportunity, particularly in its food segment. Consumer behavior is shifting, with people spending more time outside their homes, creating billions of daily consumption occasions that PepsiCo aims to capture through snacks, mini-meals, and ready-to-eat solutions. While PepsiCo already has a strong presence in the away-from-home beverage market, its food business remains underpenetrated in this space, presenting a significant expansion opportunity. PepsiCo is focusing on mini-meals and ready-to-eat formats, recognizing that consumer eating habits are evolving toward smaller, more frequent meals rather than traditional large meals. This shift aligns with growing demand for convenience and portability, making snack-based meal solutions increasingly relevant. The acquisitions of Siete and Sabra directly support this strategy by expanding PepsiCo’s presence in better-for-you snacks and meal solutions, moving beyond traditional packaged chips into nutrient-rich, protein-packed options that cater to on-the-go consumers. To fully capitalize on this opportunity, PepsiCo is increasing investments in product innovation and go-to-market strategies targeting foodservice, convenience stores, and other high-traffic away-from-home channels. By developing more tailored products and expanding distribution, PepsiCo can strengthen its presence in airports, offices, schools, entertainment venues, and other out-of-home settings where snacking and small meals are in high demand. With consumer lifestyles continuing to evolve, capturing a greater share of the away-from-home market provides PepsiCo with a long-term growth driver. Expanding beyond traditional snack packaging into mini-meals and grab-and-go solutions allows the company to increase revenue streams, enhance brand visibility, and drive incremental sales.

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Valuation

Now it is time to calculate the share price. I perform three different calculations that I learned at a Phil Town seminar. If you want to make the calculations yourself for this or other stocks, you can do so through the tools page on my website, where you have access to all three calculators for free.

The first is called the Margin of Safety price, which is calculated based on earnings per share (EPS), estimated future EPS growth, and estimated future price-to-earnings ratio (P/E). The minimum acceptable rate of return is 15%. I chose to use an EPS of 6,95, which is from the year 2024. I have selected a projected future EPS growth rate of 8% (management expects EPS to grow in the high single digits). Additionally, I have chosen a projected future P/E ratio of 16, which is twice the growth rate. This decision is based on the fact that PepsiCo has historically had a higher P/E ratio. Lastly, our minimum acceptable rate of return is already set at 15%. After performing the calculations, we determined the sticker price (also known as fair value or intrinsic value) to be $59,34. We want to have a margin of safety of 50%, so we will divide it by 2. This means that we want to buy PepsiCo at a price of $29,67 (or lower, obviously) if we use the Margin of Safety price.

The second calculation is called the Ten Cap price. The rate of return that a company owner (or stockholder) receives on the purchase price of the company is essentially its return on investment. The minimum annual return should be at least 10%. I calculate it as follows: The operating cash flow last year was 12.032, and the capital expenditures were 5.831. I attempted to analyze their annual report to determine the percentage of capital expenditures allocated for maintenance. I couldn't find it, but as a rule of thumb, you can expect that 70% of the capital expenditures will be allocated to maintenance purposes. This means that we will use 4.082 in our calculations. The tax provision was 2.320. We have 1.372 outstanding shares. Hence, the calculation will be as follows: (12.032 – 4.082 +2.320) / 1.372 x 10 = $74,85 in Ten Cap price.

The final calculation is referred to as the Payback Time price. It is a calculation based on the free cash flow per share. With PepsiCo's free cash flow per share at $5,18 and a growth rate of 8%, if you want to recoup your investment in 8 years, the Payback Time price is $59,51.

Conclusion

I believe that PepsiCo is a great company with a strong moat. I also appreciate the management team and have confidence in their ability to drive the company’s growth in the future. PepsiCo has consistently achieved a high ROIC, underscoring its strong business quality. While free cash flow and the levered free cash flow margin declined in 2024, management has implemented several initiatives aimed at improving these metrics over time. Competition remains a risk for PepsiCo as it faces pressure from global brands, regional manufacturers, and private label products, which gain traction, particularly during economic downturns when consumers seek lower-cost alternatives. Additionally, retailer pushback on price increases, as seen with Carrefour removing PepsiCo products, could further impact market share, pricing power, and distribution, creating challenges for long-term growth and profitability. Reduced future demand is another risk, as shifting consumer preferences toward health-conscious choices, including lower-sugar beverages and nutrient-dense snacks, could weaken sales growth over time. The rising adoption of GLP-1 obesity drugs adds further uncertainty, as it may accelerate a decline in demand for high-calorie and processed foods. Product recalls also pose a risk, leading to financial losses, operational disruptions, and reputational damage, which could reduce consumer trust and demand for PepsiCo’s products. Despite these risks, PepsiCo’s international growth presents a significant opportunity, with its expanding global footprint driving both revenue and margin expansion. The company’s international business now generates nearly $40 billion in revenue, leveraging scale, reinvestment, and strategic execution to improve profitability. A healthier portfolio is another compelling reason to invest in PepsiCo, as the company continues aligning its products with growing consumer demand for better-for-you snacks and beverages. By innovating with portion control, lower sodium and fat, plant-based ingredients, and functional beverages, PepsiCo is well-positioned to capture shifting health trends. Additionally, expanding into the away-from-home market presents a key growth opportunity, particularly in PepsiCo’s underpenetrated food segment, as consumer demand shifts toward convenient, on-the-go meal solutions. I believe PepsiCo is a great company, and buying shares at the intrinsic value of the Payback Time price of $119 would provide a 20% discount on the Ten Cap price, making it a strong long-term investment.

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