Washington: PepsiCo is running out of time to achieve the growth and profitability targets it outlined after activist investor Elliott Investment Management acquired a stake worth about $4 billion last year, as the growing popularity of GLP-1 weight-loss drugs continues to reshape consumer eating habits.
Attention will be focused on PepsiCo’s third-quarter results, due on Thursday, with investors watching closely for signs of improvement in its key North American business. The company has faced declining volumes as chief executive Ramon Laguarta grapples with rising input costs linked to the Iran war and persistent inflation that has weakened consumer demand.
Despite efforts to boost efficiency and cut prices by as much as 15% on products such as Lay’s and Doritos earlier this year, PepsiCo’s core operating margin fell by 15 basis points in the first half of the year to 16.3% of revenue.
The decline contrasts with the company’s December target of improving operating margins by 100 basis points over three years following discussions with Elliott.
“They have not identified a focused path to recovery in the face of the changes they’ve made. They were simply too late, and now they have the threat of GLP-1s,” said Stephanie Link, chief investment strategist at Hightower Advisors, a PepsiCo investor.
The rise of GLP-1 weight-loss medications has prompted major food manufacturers, including Kraft Heinz and Conagra Brands, to introduce healthier products and reformulate existing offerings. PepsiCo has responded with products such as Doritos Protein, SunChips Fiber and Good Warrior beef sticks.
However, concerns about changing consumer habits continue to weigh on valuations across the food industry.
PepsiCo’s enterprise value, including debt, has fallen to around 10 times earnings before interest, taxes, depreciation and amortisation (EBITDA), compared with 18 times in mid-2022. Meanwhile, rival Coca-Cola has significantly outperformed.
“The question for PepsiCo is whether volumes are finally coming back,” said David Wagner, head of equity and portfolio manager at Aptus Capital Advisors.
PepsiCo shares have fallen nearly 12% this year and are down around 16% since Elliott disclosed its investment.
According to Wagner, investors are seeking evidence that PepsiCo can maintain beverage pricing power comparable to Coca-Cola while stabilising volumes and margins in its North American snack business.
TD Cowen analyst Robert Moskow said the company’s extensive efforts to revive its Frito-Lay business, including pricing adjustments, new product launches, expanded distribution and increased marketing, have yet to deliver the expected results.
“Sales remain flat and they’re losing market share,” Moskow said.
Analysts surveyed by LSEG expect PepsiCo to report third-quarter revenue of $24.96 billion, up 4.3% from a year earlier, while adjusted earnings per share are forecast to increase 0.21% to about $2.29.
UBS analyst Peter Grom said any recovery in North America is likely to be gradual. He added that PepsiCo’s recent decision to raise some US chip prices after earlier discounts appeared reasonable if lower prices were not generating stronger sales volumes.
“If you are not going to get the volume uplift from lowering price, then I think it makes sense to have a more normal cadence of pricing,” Grom said.
