PepsiCo (PEP) beat expecatations and raised guidance in its earnings Wednesday — a development PEP stock surely needed. However, beverage and snacks company Pepsi still looks like a poor choice for a retirement portfolio.
For the most recent quarter, PepsiCo said net income fell 2% because of restructuring charges. On an adjusted basis, however, PEP earnings exceeded Wall Street’s forecast by 9 cents a share, according to a survey by Thomson Reuters. That’s a big beat, and on the surface good for PepsiCo investors.
Furthermore, PepsiCo lifted its full-year earnings forecast to 8% from 7%, or about $4.71 a share. That’s well ahead of the Street estimate of $4.54.
The market predictably applauded the news, sending PEP stock up sharply in early trading. But most important was the way in which PepsiCo delivered the beat-and-raise figures: PEP sold more snacks and drinks. Indeed, total global sales volume rose 1%.
Still, there is trouble afoot at Pepsi.
PEP Stock Faces the Dreaded Secular Shift
Unfortunately, the the closely watched North America market is a slowly melting iceberg for Pepsi. Although non-carbonated drinks posted a volume increase of 1% in the quarter, carbonated-beverage volume slipped 1%.
Like rival Coca-Cola (KO), PEP stock is facing what appear to be permanent changes in the way people snack and quench their thirsts. (On Tuesday, KO said soda volume in North America was flat, while juice drinks rose 1%.)
Sugar, fat and artificial sweeteners are nutritional bad guys, and just enough people are giving them up to make PepsiCo and KO nervous. Soda consumption has been in decline for years and looks like it might never come back. That’s the type of secular shift companies have little power to change.
The dim prospects for soda have activist investor Nelson Peltz pushing for a breakup of PepsiCo, and the idea makes some sense, since snacks are holding up better than sodas. But that also complicates PEP stock as a retirement holding, because investors can’t be sure of what they’ll wind up owning: shares in one company or two?
Finally, it’s not like PEP stock has covered itself in glory as a retirement holding as it is. True, past performance is not an indicator of future returns, but the PEP stock chart still isn’t very reassuring.
PEP stock has been a dog throughout the current bull market. Over the last five years, the broader market has more than doubled on a price basis. PEP stock is up just 58%. The 1o-year chart isn’t as ugly, but PEP still lags the S&P 500 by about 8 percentage points.
Any holding that can’t at least match market returns over the long haul makes no sense as a retirement stock, and there’s little reason to think PEP stock will manage that going forward.
If anything, it’s future is even more in doubt now — and it’s overpriced. PepsiCo has a forward price-to-earnings multiple of 19, but a long-term growth forecast of less than 8. Valuation reverts to the mean over time, which makes PEP stock look destined to underperform if held long enough.
Secular shifts, competition, history, valuation … there are too many reasons to keep PEP stock out of your retirement portfolio. Snacks and sodas aren’t going away, but growth sure is.
As of this writing, Dan Burrows did not hold a position in any of the aforementioned securities.