To The Moon

$Pepsi(PEP)$

Over the past year, PepsiCo’s stock has dropped about 24%. Over the past five years, the stock has been largely flat. This is a company I’ve talked about multiple times before. Previously, I believed Pepsi presented a strong buying opportunity around $155 to $160 per share — even in the $170s, I thought the stock looked attractive.

However, so far, I have been wrong about that call. And I want to be transparent: while I get some things right, I certainly don’t get everything right. Maybe in one, two, or three years, the stock will recover and prove my original thesis correct, but as of today, it hasn’t worked out — and it’s important to acknowledge that.

In this article, I want to share my updated opinion on Pepsi:

• Do I still believe it’s an amazing opportunity now around $135?

• Or have the recent earnings reports changed my mind about the company's prospects?

Let’s dive in.

Pepsi’s Latest Earnings: A Disappointment

In their latest quarterly results, Pepsi missed earnings per share (EPS) expectations, reporting $1.48 versus the expected $1.49. They did beat on revenue, but the EPS miss is concerning.

In terms of volumes, Pepsi’s global convenient foods segment saw a 3% decline, while beverage volumes were flat — neither is a good sign.

More worrying is the revised guidance for 2025: Pepsi now expects flat EPS growth for the year. Previously, they had guided for mid-single-digit growth (5–6%). This is a major shift and certainly not something you want to see from a company like Pepsi.

Is This a Temporary Issue or a Permanent Problem?

The key question is whether Pepsi’s challenges are short-term issues or signs of deeper trouble. After reviewing the situation, I believe the problems are temporary.

There are two main reasons for the revised outlook:

1. Tariff Uncertainty Ongoing tariff negotiations have created an uncertain environment. Once the situation stabilizes and tariffs are finalized, Pepsi's outlook should become clearer. This looks like a one-time event, not a permanent headwind.

2. Regulatory Changes (FDA Dye Ban) The FDA has announced plans to phase out synthetic food dyes by the end of 2025. Pepsi plans to eliminate artificial colors by 2026. While this will cause short-term supply chain and operational challenges, it’s a temporary transition — not a recurring issue.

Both these factors suggest that Pepsi’s lowered guidance stems from unique, short-term pressures rather than systemic problems.

A Look at Pepsi’s History

Pepsi has faced slowdowns before. There have been periods where EPS growth stalled or declined, only for the company to bounce back within a year or two. Historically, during tough periods, Pepsi’s valuation multiple has dropped to 15–18 times earnings — only to eventually rebound to its historical average around 21x.

Right now, Pepsi’s multiple is around 16x earnings, a historically low level for the stock. If the company stabilizes over the next couple of years, there’s a strong case for multiple expansion back to the mean.

From my perspective, this looks like a classic long-term buying opportunity.

Pepsi Is Not Standing Still

Pepsi is actively responding to industry shifts. They recently acquired the soda brand Poppi — a healthier, fast-growing alternative beverage — for around $2 billion. They are also adjusting their product lines to cater to consumers using GLP-1 weight loss drugs by adding more high-protein offerings.

With one of the best supply chains in the industry, vast resources, and deep brand expertise, Pepsi is well-positioned to navigate these changes successfully.

Addressing Concerns About Declining Volumes

Some investors are worried about Pepsi’s declining volumes. It’s true — since 2019, volumes have declined slightly every year, usually 1–2% per quarter. However, Pepsi has consistently offset volume declines through pricing power — raising prices 3–5% even during periods of weak demand.

Following COVID, they even raised prices by 16–17% without major pushback from consumers. To me, this demonstrates strong brand strength and pricing power, not weakness.

What About the Dividend?

Pepsi currently offers a dividend yield of about 4.2%, the highest level since 2013. The company has increased its dividend for 53 consecutive years, with an average growth rate of around 7.5% annually.

Some investors worry about dividend sustainability, especially when looking at payout ratios based on EPS. However, a more accurate measure is to look at free cash flow.

In 2024, Pepsi’s free cash flow was about $7.1 billion, lower than usual due to temporary working capital issues. For 2025, management is guiding for around $10.1 billion in free cash flow — a substantial increase that should easily support dividend payments and modest share repurchases.

The projected improvement seems reasonable given that the 2024 free cash flow was artificially depressed by one-off factors.

PepsiCo Stock Update: Temporary Headwinds Create a Long-Term Opportunity

Latest Earnings: A Tough Quarter

PepsiCo recently missed earnings expectations, posting $1.48 EPS versus the $1.49 expected. While they beat revenue estimates, global volumes fell 3% in convenient foods and were flat for beverages — not an encouraging trend. Adding to the disappointment, management cut their 2025 guidance for earnings growth from mid-single digits (5–6%) to flat (0–1%). This is a major shift, and it understandably shook investor confidence.

However, digging deeper, it’s important to ask: Are these problems temporary or permanent?

From my analysis, the major reasons behind PepsiCo’s lowered outlook appear temporary:

• Tariff uncertainty: A one-time disruption. Once new tariffs are finalized, outlooks should stabilize.

• FDA regulations on synthetic dyes: The company must phase out artificial colors by 2026. This transition will create some short-term supply chain disruptions but is not a permanent overhang.

Historically, PepsiCo has faced similar challenges before — periods of slow earnings growth triggered by regulatory or economic disruptions — but the company consistently returned to solid earnings growth afterward. Whenever earnings per share flattened or declined, Pepsi’s valuation typically compressed to around 16–18x earnings, and once growth resumed, the multiple expanded back toward 21x — its historical average.

Today, Pepsi is trading at roughly 16x earnings, indicating the market has already priced in a lot of pessimism.

Dividend and Financial Health

Pepsi’s 4.2% dividend yield is the highest it has offered since 2013, and the company has increased its dividend for 53 consecutive years at a 7.5% annualized rate.

One question I often get is: Is the dividend safe?

The short answer: Yes, very safe.

While 2024 free cash flow came in at a lower-than-expected $7.1 billion, this was largely due to a roughly $1.7 billion working capital drag — a temporary factor. Adjusted for this, Pepsi’s normalized free cash flow was closer to $8.8–$8.9 billion, more than enough to cover $7.6 billion in dividends and $1 billion in buybacks.

Looking ahead, Pepsi is guiding for $10.1 billion in free cash flow in 2025, implying even stronger coverage. The company will likely have $1–2 billion of additional cash after dividends and buybacks, giving it further flexibility to strengthen its balance sheet or repurchase more stock.

Long-Term Valuation Outlook

Pepsi’s long-term guidance calls for high-single-digit EPS growth (historically around 8%). To stay conservative, I’m using the more muted analyst consensus of 6% EPS growth starting in 2026, after a flat 2025.

Running a simple model:

• Assume 1% EPS growth in 2025 (a "hangover" year)

• Then 6% EPS growth annually from 2026–2029

• Dividend yield of 4.2%

• Valuation: Assume the P/E multiple eventually reverts from 16x back to its 21x historical mean.

Under these assumptions:

• Total 5-year upside: ~83% (about 14.3% CAGR)

• If EPS growth recovers to 8%: ~95% upside (about 16% CAGR)

For a defensive stock like Pepsi, those return expectations are outstanding. Normally, companies like Pepsi, Procter & Gamble, or UnitedHealth trade at such high multiples that 10–12% annual returns are the best you can hope for. Seeing ~14–16% potential CAGRs on a company like Pepsi is rare.

Personal Investment Approach

If I do buy Pepsi again — and I might — it wouldn’t necessarily be a long-term hold for five years. Instead, I’m targeting a shorter-term re-rating, betting that sentiment will shift back once these temporary headwinds clear.

I believe there is 30–50% upside potential within 1–2 years, similar to what happened with Nestlé during its own period of sluggish growth and later recovery. Especially if the economy weakens or we enter a mild recession, defensive names like Pepsi tend to outperform.

While the stock would be even more attractive around $118–$120, I find it unlikely that we’ll get that opportunity. At today’s price around $135, Pepsi already looks like a very attractive opportunity — particularly because the problems weighing down the stock today appear temporary, not structural.

Conclusion

PepsiCo is facing temporary challenges, not permanent ones. The current valuation looks attractive, the dividend is secure, and the stock offers an unusually high potential return for a defensive giant. In my view, the market has overreacted — and patient investors willing to wait 12–24 months could be well rewarded.

Despite the disappointing recent earnings report, I believe Pepsi’s challenges are largely temporary. The stock’s low valuation, strong brand strength, resilient cash flows, and long dividend track record make it an attractive opportunity for long-term investors willing to look past short-term noise.

In my view, Pepsi at these levels is massively oversold, and I continue to see it as a high-quality business trading at a discount.

Disclaimer: I want to make it clear that I am not a financial advisor, and nothing I say is intended to be a recommendation to buy or sell any financial instrument. Additionally, it's important to remember that there are no guarantees or certainties in trading or investing, and you should never invest money that you can't afford to lose.

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