Every year, the market produces a few head-scratchers. So far in 2019, one of those candidates is beverage-maker Pepsico (NASDAQ:PEP). Since the beginning of January, Pepsi stock has taken a commanding lead, gaining over 17%. But is such a move sustainable given its key industry?
Known throughout the world as a fierce rival to Coca-Cola (NYSE:KO), both companies specialize in sugary, carbonated beverages. Here’s the problem: sugary, carbonated beverages don’t resonate with millennials. Moreover, Pepsi attracts the plus-65 crowd, which doesn’t provide much confidence for future growth prospects of Pepsi stock.
At the same time, results speak louder than forecasts or perceptions. In this case, PEP answered critics with a strong beat for the first quarter of 2019.
Against a consensus earnings-per-share target of 92 cents, PEP delivered an EPS of 97 cents. This also beat out the year-ago level earnings by one penny. On the revenue front, the beverage-maker rang up $12.88 billion, beating the $12.7 billion consensus estimate. As a result, Pepsi jumped nearly 4%.
No doubt, this was a great showing, especially for a company whose industry has a credibility problem. But is this bullishness in Pepsi stock justified? Although the sector appears ugly, the finer details tell a different tale.
Pepsi Enjoys a Viable Marketplace
One of the most commonly-cited criticisms against a rising Pepsi stock price is the consumption behaviors of millennials. According to multiple sources, young Americans are making better dietary and health choices and avoiding harmful ones.
And that’s true to an extent. For instance, smoking trends in the U.S. have fallen off a cliff. Plus, we’re seeing beverage-makers adjust to current trends, shifting toward healthier alternatives and shelving the sugary stuff.
However, outward appearances are not what they seem. After all, if young Americans were truly making substantively healthy decisions, our armed forces wouldn’t have problems recruiting them. Unfortunately, the Defense Department has been forced to lower their standards in part because millennials are out of shape.
Dig a little deeper, and you’ll realize that no, Americans really aren’t making better choices; instead, they think they are. For instance, smoking is on the decline, but vaping is on the uptick. And while vaping is a genuinely cleaner alternative to smoking, it’s not inherently a healthy practice.
As it relates to Pepsi, a Rasmussen poll from earlier this decade indicated that slightly more than half of Americans admit to having a sweet tooth. More recent polls suggest that our national obsession with sweet or sugary concoctions haven’t changed. Despite consumer trends toward healthy food products, candy sales continue to increase. We’re still consuming chocolate at a pronounced rate relative to other nations.
In other words, the current and emergent generations are health-conscious; however, they are not healthier.
Marketing Opportunities and Pepsi stock
What the earnings report for PEP demonstrated quite clearly is that it does not have a product problem. Look at what drove overall revenues for the company: Pepsi sodas. This is the very product category that retail reports suggested would sink Pepsi stock because no one drinks soda anymore.
Really? Tell that to the folks who drove PEP stock convincingly higher.
But it’s not just that consumers are drinking more soda, or that the doom-and-gloom forecasts for this industry were premature. People consumed a substantial amount of Diet Pepsi and Pepsi Zero Sugar. What incentivized them to make that choice? Marketing.
In all seriousness, Diet Pepsi and these zero-sugar beverages are probably the most damaging beverages you can legally obtain. I mean, what’s making these drinks so sweet if there’s no sugar? Most likely, it’s some weird laboratory concoction with a name you can’t pronounce.
But from the perspective of Pepsico, do the health implications matter? Not at all. Again, we’re not a healthy generation: we have the same dietary vices as those preceding us. We just like to be told we’re healthy, even if the source has as much credibility as a used-car salesman.
Therefore, PEP has a viable channel for continued growth, largely because they have an effective marketing team. Look, the company isn’t just selling soda in a soda-unfriendly environment; it’s also selling junk food like Lay’s potato chips.
Essentially, PEP is exporting ice to Eskimos, and the Eskimos can’t get enough of it. The bull case for Pepsi stock is alive and well.
As of this writing, Josh Enomoto did not hold a position in any of the aforementioned securities.
