Softdrink company PepsiCo (NASDAQ:PEP) has benefitted from rising prices in recent years but it faces some potentially more troubling economic conditions these days. With inflation coming down and consumers looking for lower prices, PepsiCo may not find it as easily to generate strong growth anymore. And that’s evident in the company’s latest earnings report.
On Oct. 8, PepsiCo reported earnings for the third quarter and its results were mixed as its adjusted earnings per share of $2.31 beat estimates of $2.29 but revenue of $23.3 billion came in below analyst expectations of $23.8 billion. The company also slightly reduced its guidance for the year, now projecting just a low single-digit increase in its organic sales. Previously, it was expecting around 4% growth, which still wasn’t all that impressive to begin with.
Management tried to downplay the concerns, however, with CEO Ramon Laguarta saying that, “I think it’s part of the economic cycle that we’re in, and that will reverse itself in the future, once consumers feel better.”
It’s an optimistic viewpoint to just blame the economy, but the reality is that consumers have been frustrated with companies taking advantage of inflation and increasing their prices to help boost margins and profits. PepsiCo may need to reduce prices in order to win back customers, and that doesn’t bode well for a stock which is already fairly expensive, trading at a price-to-earnings multiple of nearly 26.
PepsiCo stock is trading at a premium that I don’t think is justifiable given the challenges it’s facing and its tepid growth. Investors may be better off holding off on investing in the company as the stock could be headed for trouble in the months ahead.
