Over the past six months, PepsiCo’s shares (currently trading at $144.53) have posted a disappointing 16.5% loss while the S&P 500 was down 7.7%. This might have investors contemplating their next move.
Is there a buying opportunity in PepsiCo, or does it present a risk to your portfolio? Dive into our full research report to see our analyst team’s opinion, it’s free.
Despite the more favorable entry price, we're sitting this one out for now. Here are three reasons why PEP doesn't excite us and a stock we'd rather own.
Why Is PepsiCo Not Exciting?
With a history that goes back more than a century, PepsiCo (NASDAQ:PEP) is a household name in food and beverages today and best known for its flagship soda.
1. Demand Slipping as Sales Volumes Decline
Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful staples business as there’s a ceiling to what consumers will pay for everyday goods; they can always trade down to non-branded products if the branded versions are too expensive.
PepsiCo’s average quarterly sales volumes have shrunk by 2.4% over the last two years. This decrease isn’t ideal because the quantity demanded for consumer staples products is typically stable. 
2. Projected Revenue Growth Shows Limited Upside
Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.
Over the next 12 months, sell-side analysts expect PepsiCo’s revenue to stall, a deceleration versus its 4.9% annualized growth for the past three years. This projection is underwhelming and implies its products will face some demand challenges.
3. Free Cash Flow Margin Stuck in Neutral
If you’ve followed StockStory for a while, you know we emphasize free cash flow. Why, you ask? We believe that in the end, cash is king, and you can’t use accounting profits to pay the bills.
As you can see below, PepsiCo’s margin was unchanged over the last year, showing it couldn’t improve. Its free cash flow margin for the trailing 12 months was 8.2%.
Final Judgment
PepsiCo isn’t a terrible business, but it doesn’t pass our quality test. After the recent drawdown, the stock trades at 17.1× forward price-to-earnings (or $144.53 per share). Investors with a higher risk tolerance might like the company, but we don’t really see a big opportunity at the moment. We're fairly confident there are better stocks to buy right now. We’d recommend looking at a dominant Aerospace business that has perfected its M&A strategy.
Stocks We Would Buy Instead of PepsiCo
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