PepsiCo faces pressure on growth targets as GLP-1 risks weigh on snacks demand

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PepsiCo growth targets and GLP-1

Highlights

PepsiCo's North America unit volume contracted and core operating margin fell 15 basis points to 16.3% of revenue, missing its margin improvement target.
PepsiCo shares have declined nearly 12% year-to-date and 16% since Elliott's investment, while enterprise value has dropped from 18x to 10x EBITDA since mid-2022.
Analysts expect PepsiCo to post third-quarter revenue of $24.96 billion, up 4.3%, and adjusted EPS of $2.29, a 0.21% increase from last year.

North America performance and target pressure

As reported by Reuters, attention when PepsiCo releases quarterly earnings on Thursday is centered on its largest North America unit, where volumes have contracted as CEO Ramon Laguarta contends with higher input costs linked to the Iran war and persistent inflation.

Despite record productivity savings and price cuts of up to 15% in February for products including Lay's and Doritos, PepsiCo's core operating margin is moving away from the goal it outlined in December after discussions with Elliott. In the first half, that margin is 15 basis points lower than a year earlier at 16.3% of revenue, rather than tracking toward a 100-basis-point increase over three years.

Stephanie Link, chief investment strategist at PepsiCo investor Hightower Advisors, says the company has not identified a focused recovery path and has been too slow to adapt as GLP-1 drugs reshape food demand. Elliott and PepsiCo do not respond to requests for comment in the report.

Investor concerns over demand and valuation

Weight-loss drugs are pushing food companies including Kraft Heinz and Conagra Brands to expand healthier and reformulated products, and PepsiCo has also moved in that direction with launches such as Doritos Protein, SunChips Fiber and Good Warrior beef sticks.

Even so, the market impact remains visible in food sector valuations. PepsiCo's enterprise value, including debt, has fallen to 10 times EBITDA from 18 times in mid-2022, while rival Coca-Cola has outperformed. PepsiCo shares are down nearly 12% so far this year and about 16% since Elliott's investment.

David Wagner, head of equity and portfolio manager at Aptus Capital Advisors, says investors want beverage pricing power that keeps pace with Coca-Cola and evidence that unit volumes and margins in North American snacks have stopped deteriorating. TD Cowen analyst Robert Moskow says PepsiCo's extensive efforts in its U.S. Frito-Lay business, including pricing changes, new products, wider distribution and higher marketing spending, have still produced flattish sales and market-share losses.

Analysts polled by LSEG expect PepsiCo to report third-quarter revenue of $24.96 billion on Thursday, up 4.3% from a year earlier, while adjusted earnings per share are expected to rise 0.21% to about $2.29. UBS analyst Peter Grom says any North America improvement is likely to be gradual, and adds that PepsiCo's move last month to raise some U.S. chip prices with inflation may be justified if lower pricing is not delivering a volume rebound.

Our earlier report on negative momentum readings on Bursa Malaysia highlighted six counters—including glove makers such as Adventa, Careplus, Comfort Gloves, Supermax and Top Glove—flagged by an algorithmic screener for high volume and notable price moves. The piece explained that these indicators are short-term timing signals rather than buy/sell calls, and noted that sector margins can remain vulnerable due to cost pressures and lingering oversupply concerns.

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