3 Reasons to Sell PEP and 1 Stock to Buy Instead

PepsiCo trades at $146.70 per share and has stayed right on track with the overall market, gaining 11.3% over the last six months. At the same time, the S&P 500 has returned 11.3%.

Is there a buying opportunity in PepsiCo, or does it present a risk to your portfolio? Get the full breakdown from our expert analysts, it’s free for active Edge members.

Why Is PepsiCo Not Exciting?

We don't have much confidence in PepsiCo. Here are three reasons you should be careful with PEP and a stock we'd rather own.

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 2.3% 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 Is Slim

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 rise by 3.8%, close to This projection is underwhelming and indicates its newer products will not catalyze better top-line performance yet.

3. Shrinking Operating Margin

Operating margin is a key profitability metric because it accounts for all expenses enabling a business to operate smoothly, including marketing and advertising, IT systems, wages, and other administrative costs.

Looking at the trend in its profitability, PepsiCo’s operating margin decreased by 2.4 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its operating margin for the trailing 12 months was 11%.

Final Judgment

PepsiCo’s business quality ultimately falls short of our standards. That said, the stock currently trades at 17.5× forward P/E (or $146.70 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're pretty confident there are superior stocks to buy right now. Let us point you toward the most dominant software business in the world.

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