PepsiCo

PepsiCo's organic revenue rose 3% in the third quarter of 2026, with international sales up 8% and North American beverage and food sales roughly flat. Core operating margin contracted 35 basis points to 16.9%.

Why it matters: Volumes have been a problem for its North American segments, so we were encouraged by sequential improvement in its food (flat from down 2% in the second quarter) and beverage (down 2% from down 4%) businesses. Meanwhile, input cost inflation looms. The firm reported growth in its North American snacks business (unquantified) despite stout consumer headwinds. But while North American beverage volume declines eased, PepsiCo continued to underperform the carbonated soft drink category (unquantified). Costs are likely to rise as hedges roll off, and the $178 million tariff refund benefit does not extend past the third quarter. Management will not cut back on investment to offset higher costs, which we think is prudent to support growth but doesn't alleviate pressure on margin.

The bottom line: We expect to lower our $169 per share fair value estimate for wide-moat PepsiCo by a low-single-digit percentage. Management narrowed guidance for full-year organic revenue growth to 3% (from 2%-4%) but lowered adjusted EPS growth to 2.5%-3.5% (from 5%-7%). The reduction of our 2026 projections of 4% and 7%, respectively, should drive the fair value cut. Shares were up 4%, as results weren't as bad as the market likely feared. We think PepsiCo is undervalued, as investors doubt its ability to restore consistent profit growth (relative to our preprint forecast of 5% adjusted EPS growth over the next five years).

Between the lines: Management discussed potentially refranchising certain parts of its North American bottling network. We think it would be complex to mimic Coca-Cola's North American structure given synergies with selling its food, but it could benefit margins.

For a more detailed analysis of the toolkit at PepsiCo's disposal to fuel growth in its US and international operations, please refer to our deep-dive report published in November, 'PepsiCo Shares Lost Their Fizz, but We See a Revival on the Horizon.'

We maintain our fair value estimate for PepsiCo of $169 per share. Our intrinsic valuation implies 18 times 2027 adjusted earnings per share and a 12.9 times EV/adjusted EBITDA multiple.

PepsiCo's organic revenue rose 2% in the second quarter, comprising mid- to high-single-digit expansion internationally, 1% growth in North American beverages, and a 2% decline in North American foods. Core operating margin fell 40 basis points to 16.8%. While it seemed the North American foods business (PepsiCo's largest at 30% of precorporate

core operating profit) began to recover in the first quarter, headwinds returned. Organic revenue in the segment declined 2% in the second quarter amid flat volume driven by increased financial constraints on consumers. US consumers pulled back on impulse purchases with the rise in gas prices, but PepsiCo saw volume share gains. We think this shows that its affordability and innovation efforts are bearing fruit amid category struggles, though management now expects a more gradual recovery

Over the next 10 years, we forecast the top line to grow at midsingle digits annually. We see broad-based strength in its snack revenue growth, whereas trends are more mixed in the beverage business. We expect its strong brands, coupled with secular tailwinds in convenience food consumption, to drive mid-single-digit growth in snack revenue (about 60% of total sales). A diverse beverage portfolio should also enable PepsiCo to capture an expanding share in non-CSD categories such as sports, water, and ready-to-drink coffee, but its CSD business will likely remain flat, with healthy emerging-market growth offsetting soft demand in the US and Western Europe. We forecast overall beverage sales to grow at a low-single-digit clip over the next 10 years. Historically, PepsiCo has augmented organic growth with strategic acquisitions, and we anticipate that this two-pronged growth strategy will continue. However, we have refrained from incorporating M&A into our explicit forecast until we gain better visibility surrounding its deal pipeline.

On the profitability front, we have modeled operating margins widening by 170 basis points to 16.1% by the end of our 10-year forecast period, relative to 2025. In addition to gross margin expansion of roughly 50 basis points over the period thanks to manufacturing efficiency gains in the snack business and a slightly higher mix of international beverage business with an outsourced model, we forecast more efficient selling and distribution spending (32.9% of sales by 2035 versus 34.0% in 2025), and a slightly better leverage of marketing expense (5.6% of sales by 2035 versus 5.7% in 2025).

We surmise that PepsiCo has built a wide economic moat around its global snacks and beverage operations, thanks to an impressive ensemble of brands underpinning consumer loyalty and close retailer relationships, as well as significant scale benefits ($94 billion revenue base, global manufacturing and distribution capacity) that bring bargaining power and lower operational costs. We expect the firm to deliver investment returns that exceed its cost of capital for more than 20 years. On our estimate, PepsiCo will generate returns on invested capital, or ROICs, including goodwill, averaging 22% over our explicit 10-year forecast period, compared with our weighted average cost of capital at 7%.

Evidencing its dominant standing, PepsiCo ranks as number one in the $247 billion global savory snacks market, controlling 22% of the market in 2025 per Euromonitor through well-known brands such as Lay’s, Cheetos, and Doritos. Consistent brand investments ($5.4 billion in 2025, 6% of sales), similar to the level of spending by wide-moat peer Mondelez (around 5% of sales) have reinforced the image of these snacks as affordable treats in today’s fast-paced life, thus allowing the snack provider to fetch pricing gains while maintaining healthy volume growth. As Pepsi continues to focus on innovation in areas such as natural ingredients and packs to meet consumers’ evolving snacking habits and preferences, we expect its snack brands will remain top of mind for a wide variety of consumer occasions and maintain pricing power.

Further, as the world’s second-largest beverage provider behind Coca-Cola, PepsiCo owns a broad portfolio of strong brands in carbonated soft drink, or CSD, and nonsparkling categories and operates the bulk of bottling capacities in-house to better control the commercialization process. The firm has kept a firm grip on its number two position in the CSD category—roughly half of total beverage volume sold by PepsiCo—which we believe still offers room to grow through higher penetration primarily in emerging markets. Beyond this global growth potential, we posit Pepsi has built strong brand loyalty on taste preferences and emotional connections, and when juxtaposed with the low 5% private-label penetration that categorizes the space, we think PepsiCo’s well-known CSD brands are poised to continue to extract strong investment returns through its pricing power. Outside of the CSD category, the company has successfully diversified its reach by bringing strong brands into the fold, achieving volume share gains in structural growth areas such as sports and energy drinks. For one, the Gatorade brand dominates the sports category with a 30% plus volume share globally per Euromonitor and continues to broaden its brand appeal and reach with smart advertising and innovation in ingredients and flavoring. In energy drinks, PepsiCo is poised to expand share by utilizing a multi-brand approach with in-house brand Mountain Dew in addition to distribution partnership with and investments in Celsius to score some share gains in a market increasingly segmented by lifestyle needs. Top volume shares in the ready-to-drink coffee and tea categories, under the Lipton and Starbucks brands licensed from Unilever and Starbucks, also help fortify PepsiCo’s competitive edge by augmenting its beverage lineup, adding to its distribution scale, and further deepening its relationship with retailers with extra touchpoints during delivery and shelf planning.

A strong portfolio of top-selling brands that drives traffic and purchase in both the snack and beverage aisles makes PepsiCo an indispensable partner to most retailers from grocers to gas station stores. Equipped with a full suite of beverages in both CSD and nonsparkling categories, a variety of snack brands catering to different budget sizes and regional preferences, and a technology enhanced direct-to-store logistics system, PepsiCo provides an efficient, one-stop solution to retail chains for inventory planning, stocking, and replenishment that is hard to match. The reliability and flexibility of a proven distribution giant like PepsiCo should be deemed particularly valuable now, as many retailers are still reeling from logistics bottlenecks. In return for these benefits, PepsiCo earns favorable shelf allocation/placement and some liberty in designing and implementing in-store promotions that reinforce brand awareness and pricing power. Close retailer collaboration also enables PepsiCo to derive valuable insights on consumers and retail dynamics from transaction and logistics data analytics, which should inform timely and precise commercial plans and execution to keep the firm at the top of its game.

With a massive revenue base at $94 billion in 2025, the firm commands significant bargaining power in a wide range of procurement negotiations ranging from raw materials to advertising services. Purchases for key ingredients such as sugar, sweeteners, seasoning, and cooking oil each take only a single-digit-percent of a dispersed basket for PepsiCo, allowing the firm to tightly manage procurement costs even during periods of high inflation. We also see a cost edge stemming from its massive distribution scale, allowing the firm to reach more retailers and consumers faster and at a lower cost. The scale benefit allows PepsiCo to not only accelerate its own product commercialization to maximize profitable share gains in new and existing categories, but also attract desirable partners to license their brands to the firm’s distribution platform, adding to its scale and distribution clout. We would point to PepsiCo’s 30-years long successful distribution partnerships with wide-moats Unilever and Starbucks (both topnotch operators in and of themselves) in the tea and coffee categories as strong examples of PepsiCo’s distribution scale and prowess.

Demographic and lifestyle shifts could further fuel snack consumption globally beyond our expectations.

Even as CSD volumes wane in mature markets, the diversity of Pepsi’s beverage portfolio should offer growth opportunities in both developed and emerging markets.

Despite its close relationships with brick-and-mortar retailers, PepsiCo has invested in omnichannel capabilities and a digitally enhanced supply chain that positions the firm for growth even as consumer shopping patterns bifurcate further.

Shifting consumer preference to healthier snacks and beverages may impede the firm’s ability to pass on higher costs in price increases thus weighing on margins and returns.

Expansion of capacity investments in international markets where PepsiCo has less experience (such as Africa) may expose the firm to unfamiliar regulator environment and execution risks.

The shortage of bottlers with sufficient scale and experience in international markets will continue to handicap PepsiCo’s efforts to narrow the gap with rival Coca-Cola in soft drinks.