Key Points
PepsiCo's shares have woefully underperformed the S&P 500.
The company has cut prices in an effort to stay competitive.
It has seen volumes increase during the first half of the year.
Recently, PepsiCo (NASDAQ: PEP) shareholders would've been much better off putting their money in an S&P 500 index fund. That's because the snack and beverage maker's shares lost 0.4% over the past year, through July 28, while the S&P 500 gained 16.3%.
Clearly, the company's results have proven disappointing. But before investors give up on the stock, there are reasons for optimism, starting in the second half of the year.
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Here's why results and the share price could start improving.
Boosting demand
Earlier this year, management decided to lower prices on certain items in an effort to increase volume among cost-conscious consumers weary from inflation and ward off competitive threats.
This year's revenue results demonstrate that this decision appears to be working. Second-quarter revenue, adjusted to remove foreign-currency translation effects and the impact of acquisitions/divestitures, grew a fairly low 2.4% year over year. Management expects this year's revenue growth to be 2% to 4%.
But it's important to look at how the company achieved the revenue gain. That's because higher volume contributed about 1 percentage point. This comes on the heels of a 2.6% first-quarter sales gain, with volume contributing slightly.
It's nice to see positive sales volume momentum build after it implemented price cuts. While 2025's revenue rose 2%, price increases added 4 percentage points, and volume took away 2 percentage points. That's not a long-term sustainable path.
As consumers continue clamoring for lower-priced items, PepsiCo has put itself in a better competitive position. Investors will undoubtedly appreciate the company's continued volume gains.
Image source: Getty Images.
Tempting valuation
Meanwhile, as management executes its plan, PepsiCo shares trade at a cheap valuation. The stock has a price-to-earnings (P/E) ratio of 18, well below the five-year median of 26. The shares also look attractive compared to other large-cap stocks, with the S&P 500 trading at a current multiple of 28.
Clearly, the market doesn't expect much from PepsiCo. While sales growth isn't great, management has taken initial steps to increase the rate. After holding talks with activist investor Elliott Investment Management, the company announced several steps to grow faster and improve profitability. Aside from prices, it will also look at more innovative products and ways to cut costs.
And Elliott Investment Management, which owned 1.3 million shares at the end of the first quarter, could serve as a catalyst for the stock price. After all, it will happily prod management to quickly enact the agreed-upon steps.
With early progress on management's plan and an attractive valuation, PepsiCo's share price looks poised for a nice run.
Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.