Pricing Power or PepsiCope?

Stock of the week: PepsiCo

Earnings season really kicks into gear from this week, with big financials such as JPMorgan, Morgan Stanley, Citi & BlackRock reporting. We’ll also hear from Delta Airlines, United Health Group and chip giant TSMC.

It’s the start of a busy reporting period that’s set to guide investor expectations for the months ahead:

Let’s focus on another household name though: PepsiCo is first to report (Wednesday, before the US market opens) and also our stock of the week.

Why PepsiCo? Because last quarter the company was able to pass on price increases without too much pushback. The consumer giant raised prices by 12% on average in the second quarter, and guided towards 10% annual revenue growth driven by “the strength and resilience of our categories and consumer demand trends”.

More price hikes were in the pipeline, and the company saw no reason why higher prices should excessively impact revenues.

PepsiCo is the parent company for many household names, including Lays/Walkers crisps, Quaker oats, as well as famous drinks brands such as Pepsi (obviously!), Ocean Spray, Lipton, and many more.

Across markets, there’s a huge focus on the health of the consumer now. Plenty of anecdotal reports suggest that customers have begun to ‘trade down’ in their purchases, buying cheaper, unbranded products or smaller quantities.

PepsiCo’s reports will be a key input into this picture. How much pricing power does the company truly have in this environment?

PepsiCo shares have held up remarkably well this year. While the S&P 500 is down by over 20% and many growth stocks are down far more, this consumer staple is only down by just over 10% from the August peak, and -6.5% since the start of the year.

However, the stock is now starting to trade weaker on a technical basis, recently falling below both the 20 and 200 day moving averages.

So, will investors continue to hide out in defensives such as PepsiCo?

You can certainly make the case for doing so given the uncertainty in the world, but there could be some counterintuitive logic coming into play, especially if the numbers disappoint. PepsiCo has been a relative outperformer, and with a forward P/E of 24.4, it’s not exactly cheap.

If the earnings portion of that forward price/earnings (P/E) ratio begins to head lower, it might be hard to justify paying such a premium over the index average.

Also, as the market continues to look hopefully for signs of looser monetary policy amid the economic slowdown, some brave investors might rebalance into growth stocks at far cheaper valuations and try to get ahead of the pack.

According to Refinitiv, analysts estimate an earnings per share reading of 1.83. After the last earnings report, Chairman and CEO Ramon Laguarta said:

“We are pleased with our results for the second quarter as our business momentum continued despite ongoing macroeconomic and geopolitical volatility and higher levels of inflation across our markets”

Will he still be sounding so positive after this report? The answer could have implications far beyond PepsiCo’s own fortunes.