PepsiCo: Weathering the Storm and Looking to the Future

The "Ozempic Effect" and Shifting Tides in Consumer Staples

PepsiCo, a titan in the consumer staples industry, has faced challenges this year due to the so-called "Ozempic effect" and changing investor sentiment. However, the potential impact of weight-loss drugs on PepsiCo's snack-food and beverage empire is likely to be minimal.

Beyond its beverage line, Pepsi boasts a best-in-class snack-food franchise through Frito-Lay, renowned for beloved brands like Doritos, Cheetos, and Lay's potato chips. Notably, Frito-Lay contributes more than half of the company's profits, making PepsiCo less reliant on sugary soda compared to competitors such as Coca-Cola.

Addressing Concerns and Embracing Growth

Fears surrounding the influence of weight-loss drugs on consumer snacking habits led to a 7% drop in PepsiCo stock in 2023, with prices at $168. However, PepsiCo remains confident in its outlook. In October, the company announced its expectation to achieve per-share earnings growth at the high end of its annual target in 2024, following a projected 13% increase in earnings for the current year. Furthermore, with a forward price-to-earnings ratio of 20.6, PepsiCo's stock trades below its five-year average. Moreover, it offers a competitive yield of 3% and has consistently raised its dividend for an impressive 51 consecutive years, including a recent 10% boost.

Ozempic: Limited Adoption

Considering the broader context, the usage of Ozempic remains limited, estimated to reach around 1% of the population in 2024. This indicates that any potential impact on PepsiCo's market performance is unlikely to be significant.

An Analyst's Perspective

In a recent note to clients, Jefferies analyst Kaumil Gajrawala affirmed PepsiCo's resilience as a business, labeling it the most durable within their coverage. This sentiment echoes the notion that betting against established American brands rarely proves successful.