PepsiCo Earnings: Soft Demand and Higher Costs Send Earnings Outlook Lower

Key Morningstar Metrics for PepsiCo

• Fair Value Estimate: $170.00
• Morningstar Rating: ★★★★
• Morningstar Economic Moat Rating: Wide
• Morningstar Uncertainty Rating: Low

What We Thought of PepsiCo’s Earnings

PepsiCo PEP posted 1% organic sales growth in the first quarter of 2025 as a 5% lift in international revenue more than offset a 2% decline in US food sales. Core constant-currency operating profit fell 1%.

Why it matters: Strong international performance enabled PepsiCo to reaffirm its low-single-digit organic sales growth outlook for 2025. However, the firm reduced its full-year EPS outlook from low-single-digit growth to a 3% decline due to weaker US demand and higher supply chain costs.

• Internationally, growth prospects are particularly strong in Europe, India, and Brazil, where PepsiCo has the highest sales exposure. However, macro and tariff headwinds may continue to weigh on consumer demand in Mexico and China.
• In the United States, beverage performance improved with a 14% rise in organic operating profits on favorable pricing and cost savings. But a 1% decline in snack volume suggests that the Frito-Lay turnaround will likely take a longer time and more investments.

The bottom line: We plan to trim our $170 per share fair value estimate for wide-moat PepsiCo by a low-single-digit percentage on lower 2025 earnings. Shares remain undervalued as the market prices in pessimistic assumptions for US food over the longer term.

• We maintain our 10-year forecast calling for 4% annual sales growth, fueled by low-to-mid-single-digit US sales growth, and mid-single-digit expansion in international business.
• We also forecast adjusted operating margins to expand by 220 basis points over the next 10 years to reach 16.3% by 2034, as efficiency gains and cost-saving initiatives bear fruit.

Coming up: Regarding the Food and Drug Administration’s plan to phase out certain artificial food coloring by 2026, we see PepsiCo as well-prepared for the transition.

• The firm confirmed that over 60% of its food products in the US today contain no chemical dyes. The percentage will likely go up significantly, as Lay’s and Tostitos aim to shift completely out of artificial colorings by the end of 2025.