PEP

Is This a Sign PepsiCo's Stock May Have Peaked?

Shares of PepsiCo (NASDAQ: PEP) have been declining for multiple months now. And over the past year, the stock is now down around 6%. This has been a fairly safe stock to own amid inflation, because the soft drink and snack company has been able to pass along rising costs to consumers.

However, there is now some cause for concern given more challenging conditions that could be on the horizon for the business. Let's see what might be best for investors to do now.

PepsiCo's sales were down last quarter

PepsiCo isn't normally a fast-growing stock. But over the past few years, it has generally had no problem generating year-over-year growth. In its most recent quarterly results, however, that changed. For the last three months of 2023, PepsiCo's net revenue declined by 0.5% to $27.9 billion. The company's expansion rate hasn't been in this bad shape since the early stages of the pandemic.

PEP Revenue (Quarterly YoY Growth) Chart

PEP Revenue (Quarterly YoY Growth) data by YCharts

Demand for PepsiCo's products slumped in all segments

Consumers have typically continued to buy PepsiCo's products even as the company has increased prices. After all, at just a few dollars, they still aren't terribly expensive items to buy. But over time, those price hikes add up, and consumers do eventually reach a breaking point.

What was perhaps more concerning about PepsiCo's recent earnings report was that volumes were down across the board. In each one of the company's segments, demand had declined versus the same period last year. Organic volume fell 4% overall, which offset the effects of price increases. Exacerbating those problems was a recall related to the company's Quaker brand granola bars and cereals due to possible salmonella contamination.

Could things get worse?

Another possible problem for investors to worry about is retailers fighting back against the price hikes. Carrefour, a major French multinational retailer, recently stopped carrying PepsiCo's products, saying that its price hikes have become excessive. While it may be a negotiating tactic with PepsiCo, it could have an impact on its pricing strategy and possible demand for its products.

France accounts for a fairly modest 1% of PepsiCo's top line, but given the overall picture of volumes declining in multiple markets, it could be a sign of greater pushback from not just consumers, but retailers as well.

For PepsiCo, which normally doesn't generate much significant revenue growth, even small headwinds could collectively make a noticeable impact on the company's top and bottom lines. For now, it's too early to tell if the spat with Carrefour will prove to be material or not, but it could nonetheless lead to a tough path ahead for PepsiCo as it goes up against some stronger numbers from last year.

Is PepsiCo's stock too expensive?

Currently, PepsiCo's stock trades at 25 times trailing earnings. That is a bit high for a company that may only generate single-digit growth, but it's in line with PepsiCo's five-year average.

PEP PE Ratio Chart

PEP PE Ratio data by YCharts

The consensus analyst price target is almost $188, implying upside of around 13% for the food stock. Investors have been paying a bit of a premium for the shares in recent years given strong consumer spending, but if PepsiCo's growth rate struggles to stay in positive territory, even maintaining this valuation could prove to be a challenge.

Is PepsiCo stock a buy?

PepsiCo has some strong brands in its portfolio and it could be a good long-term investment, especially when you consider it pays a dividend that yields 3%. But it is a bit pricey, and there are arguably better stocks to choose from that have more modest valuations. While PepsiCo isn't a bad buy, investors may want to consider other options.

Should you invest $1,000 in PepsiCo right now?

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David Jagielski has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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