Pepsi (PEP): This Consumer Staple Is About to Pop

Call it a blue‑chip sleeper: for more than a century, this snacks‑and‑soda colossus has quietly compounded shareholder wealth while its larger‑than‑life rival soaked up the spotlight. Last quarter was merely the latest example—core EPS of $2.12 beat the Street by 4%, organic revenue accelerated to 6.8 percent, and free cash flow widened despite freight and resin inflation. Yet the shares still trade at a discount to the broad staples group, let alone to its arch‑nemesis.

That under‑the‑radar performance fits a long pattern. Born in the throes of the Great Depression, the company merged with a salty‑snack upstart in 1965, later spun off a fast‑food empire, and has chalked up 51 consecutive years of dividend hikes. For investors who bought in the doldrums of 2009, total return has more than tripled the S&P 500.

Despite that pedigree, the stock languishes between high‑growth tech darlings and the splashy cola brand everybody loves to hate. With management’s cost‑cutting engine finally revving and emerging‑market demand bubbling up, the opportunity for rerating looks too tempting to ignore.

And that sleeper?

PepsiCo (PEP)

A leaner, meaner bottler. Under CEO Ramon Laguarta, PepsiCo has pressed the accelerator on a multiyear productivity program first sketched in 2019. Automated palletisers, AI‑driven route optimisation and smaller, flexible “micro‑fulfillment” plants are on track to wring out more than $1.5 billion of savings in 2025 alone—roughly 150 basis points of operating margin if reinvestment is held constant. Capex remains a modest 4 percent of sales versus a 6 percent average for global CPG peers, leaving ample firepower for buybacks.

Crucially, the company’s once‑troubled bottling arm is now profitable in every geography, a feat that looked fanciful as recently as 2020. Coupled with favourable hedges on corn and aluminium, management expects at least 30 basis points of gross‑margin expansion next year even if freight costs stay sticky.

New fizz in the product pipeline

Cost discipline hasn’t come at the expense of innovation. Pepsi Zero Sugar received its first reformulation in over a decade, delivering a 25 percent jump in U.S. retail sales and finally besting its red‑can rival in blind taste tests. Nitro Pepsi—infused with nitrogen micro‑bubbles—is pulling incremental shoppers who long ago swore off colas, while Bubly sparkling water is tracking toward a double‑digit share in the flavoured‑water aisle.

Snacks are just as busy: Frito‑Lay’s Flamin’ Hot platform now spans a dozen brands and generates close to $4 billion in annual retail sales. The company is even dipping a toe back into alcohol via a national rollout of Hard Mountain Dew, a collaboration with Boston Beer that carries mid‑teens margins and minimal cannibalisation risk.

Overseas tailwinds

Roughly 45 percent of Pepsi’s revenue now comes from outside North America, and those markets are only just warming up. Latin America posted high‑single‑digit volume growth, helped by affordable single‑serve packs priced below one U.S. dollar. In India, the energy‑drink brand Sting has already overtaken Red Bull by units and still operates at less than half the distribution points of carbonated colas.

Meanwhile, a new concentrate facility in Poland cuts freight costs into EMEA by an estimated $120 million annually and halves lead times, allowing Pepsi to push local flavours—think lime‑and‑mint colas in the Gulf or masala chips in Pakistan—faster than regional rivals. Given the widening income gap between emerging and developed markets, that mid‑single‑digit volume growth could persist even through a U.S. slowdown.

A value menu price

Despite all those growth levers, Pepsi trades at roughly 17.7× forward earnings and 13× EV/EBITDA. Coke sits near 22× earnings; Hershey, fighting recessionary volume pressure, fetches 30×. A simple re‑rating to the low‑20s multiple Pepsi captured in prior cycles would put the shares in the low‑$230s—about 20 percent upside before any dividend.

Get paid to wait. Income investors won’t leave thirsty. Pepsi is a member of the vaunted “Dividend Kings” club, having lifted its payout for 51 consecutive years. The current $5.69 annual dividend equates to a 3.9 percent yield, and with a payout ratio below 70 percent of trailing free cash flow, the board still has room for mid‑single‑digit hikes.

Bottom line

Wall Street loves a bubbly narrative, and right now that story line centres on Ozempic‑friendly food start‑ups. That leaves Pepsi’s mix of defensive cash flows, self‑help margin catalysts and emerging‑market torque strangely under‑appreciated. For bargain hunters willing to look past the froth, this is a blue‑chip that still offers plenty of pop.