THE PepsiCo Inc. (DYNAMISM – Free Report stock has seen mixed trading on the stock exchanges since its Q2 2024 earnings release on July 11, 2024. Shares of the beverage and snack giant have posted a modest 5.3% gain since the last earnings release. This modest growth reflects mixed investor sentiment. Let’s see if this is related to the company’s Q2 performance, its outlook, or other specific factors.
PepsiCo’s second-quarter results were mixed, with the company beating the Zacks Consensus Estimate for earnings per share (EPS) but missing on revenue. PepsiCo posted modest revenue growth of just 0.8% in the second quarter, well below the 10.4% growth seen in the year-ago quarter. Additionally, revenue was a sharp slowdown from the 2.3% increase seen in the first quarter.
While the company has done a remarkable job of protecting its bottom line, through comprehensive cost management initiatives, the significant slowdown in revenue growth requires further introspection.
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North American companies sound the alarm
PepsiCo’s North America operations faced several headwinds in 2024, impacting its overall business performance. Challenges faced by the Quaker Foods North America (QFNA) segment, particularly issues related to product recalls, were a significant factor.
The QFNA segment, which includes brands such as Quaker Oats, was negatively impacted by product recalls related to contamination concerns such as salmonella, affecting various cereal and snack products. These recalls weakened the segment’s performance, leading to lower sales and profits in recent quarters.
In the second quarter, the QFNA segment had a significant impact on the company’s overall organic sales, contributing to a decline of 60 basis points. Organic sales in this segment declined 18% compared to the prior year, driven by the impacts of product recalls and weaker demand in the category. In addition, core operating income declined 23% compared to the prior year, primarily due to the impacts of product recalls and certain inflationary pressures.
Product recalls have not only disrupted sales but also led to additional costs associated with the recall process, including logistics, communication and risk of brand damage. Therefore, analysts are cautious about the QFNA segment’s near-term recovery prospects.
Beyond product recalls, the company has faced lower consumer demand in its key North American markets. This decline is partly attributed to higher prices, which have led to reduced volumes as consumers have adjusted their spending habits amid economic pressures. For example, the Frito-Lay North America (FLNA) division saw a 4% volume decline compared to the prior year in the second quarter, while the PepsiCo Beverages North America (PBNA) division saw a 3% volume decline.
It is worth noting that organic sales in the FLNA segment were flat year-over-year in the second quarter, compared to a 14% increase in the second quarter of 2023. The PBNA segment reported a 1% increase in organic sales in the most recent quarter, in sharp contrast to the 10% growth in the prior-year quarter.
Estimates suggest changing dynamics
The Zacks Consensus Estimate for PepsiCo’s third-quarter 2024 EPS has declined 3.8% over the past 30 days, highlighting growing concerns about the challenges the company is expected to face in the North American market in the near term.
The Zacks Consensus Estimate for PepsiCo’s 2024 EPS has fallen by a penny over the past 30 days. The same for 2025 EPS has also declined by a penny over the past seven days. These downward revisions to earnings estimates reflect analysts’ growing concerns about the stock.
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Undervalued stocks
Although PEP stock is currently trading at a discount to its industry peers, this valuation disparity may not be as favorable as it seems. The lower price could be a sign of underlying issues rather than representing a clear investment opportunity.
PepsiCo is currently trading at a 12-month forward P/E ratio of 20.29X, below the industry average of 21.05X and the S&P 500 average of 21.17X.
The stock is also trading at a discount to its peers, including The Coca-Cola Company (KO – Free report), Monster Drink (MNST – Free report) and Vita Coco Company (COCONUT – (Free Report), which are trading at 12-month forward price-earnings multiples of 22.62X, 27.08X and 23.93X, respectively.
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Conclusion
PepsiCo’s Q2 2024 results present a complex picture of its current situation, particularly impacted by product recalls in its North American operations. The challenges in the QFNA segment, combined with a slowdown in consumer trends, warrant a cautious approach for existing investors. Potential investors should consider waiting for clearer signs of recovery before investing in this Zacks Rank #4 (Sell) stock.
You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.
