PepsiCo Inc. (PEP) is a well-managed company with a valuable brand portfolio, and continues to generate solid growth amid weak demand for many consumer staples, asserts John Staszak, an analyst with Argus Research, a leading independent Wall Street research firm.

On average, 11 of the 15 top-selling products in convenience stores come from PepsiCo, and Lay’s is the world’s best-selling snack food brand, having expanded sales from $100 million fifty years ago to $30 billion today.

Despite fewer orders from restaurants, theaters and stadiums, we expect cost cutting to continue to benefit earnings, and look for PepsiCo to achieve its goal of $1 billion in annual cost savings and productivity gains through 2023. Initiatives include optimizing the company’s global manufacturing footprint and reengineering its distribution network.

In 2022, PepsiCo shares have risen 5%, compared to a 16% loss for the S&P 500. Given the company’s innovative products and pricing power, we think that the shares can move higher.

On October 12, PepsiCo reported 3Q22 revenue of just under $22.0 billion, up 9% from 3Q21 and above the consensus estimate of $20.8 billion. Organic revenue rose an above-consensus 16%.

In its 3Q earnings release, management revised its 2022 guidance. The company projects full-year organic revenue growth of 12% (up from a prior 10%) and 10% EPS growth (up from 8%). It continues to expect $7.7 billion in cash returns to shareholders, consisting of $6.2 billion in dividends and $1.5 billion in share buybacks. It looks for core earnings to increase to $6.73 per share, up from a prior $6.63 and from $6.25 in 2021.

We believe that PEP shares are undervalued at 24.4-times our 2023 EPS estimate, below the five-year historical average and near the average of 24.5 for other large beverage companies. The price/sales ratio is 3.0, in line with the five-year average, and the price/free cash flow ratio is 23.2, slightly above the five-year average of 22.9.

We think that prospects for additional dividend hikes, share buybacks, and strong earnings warrant a higher valuation. Our revised target price of $206, combined with the dividend, implies a potential total return of 15% from current levels.

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