PepsiCo Had a Rough 2023. Expect 20% Returns for 2024.

PepsiCo (PEP) is down 7%YTD. But using the strategy of sector rotation, Omega Trades sees this stock as the hottest pick for 2024.

Let's look into why PepsiCo has been down recently, and why this has led to an undervaluation.

PepsiCo (PEP) Stock, Past One Year

PepsiCo (PEP) had a challenging 2023, as will be discussed. This decrease primarily stems from market sentiment rather than fundamental weaknesses. The rejection of consumer-staples stocks, including Pepsi, during the S&P 500's rally post-2022's bear market, along with higher bond yields and concerns over weight-loss drugs impacting snacking habits, have contributed to this sentiment.

The Resilience of Pepsi

However, as 2023 concludes, sentiments might be on the verge of a shift. The reduction in bond yields and growing concerns about economic growth may redirect attention to staples, potentially making them an essential asset once again. Additionally, Pepsi's anticipated growth is set to accelerate as investments made in the last five years start to yield returns. Analysts' sentiments support Pepsi's resilience, considering it a durable business likely to outperform in risk-off environments and to compound earnings ahead of peers.

The concerns surrounding weight-loss drugs impacting Pepsi's snack business might be overstated, as indicated by industry experts. Companies in the packaged-foods sector view the volume-related worries linked to weight-loss drugs as exaggerated and foresee no immediate negative impact on their businesses.

New Products, New Strategy, New Revenue

Pepsi has strategically begun diversifying its product offerings towards healthier options by reducing package sizes, introducing zero-sugar beverages, and acquiring brands focused on health and wellness products. Leveraging its global distribution network, Pepsi aims to market these products to consumers who previously preferred traditional snacks. 

Despite a slight decrease in product volumes, Pepsi has implemented high-single-digit price increases, resulting in almost 9% sales growth in the first three quarters of the year. The company anticipates a 4.6% growth in total revenue next year, with a marginal increase in demand and volumes. 

With approximately $60 billion in investments made since 2018, Pepsi foresees profit margins expanding in the upcoming year. Operating margins are expected to rise, and earnings per share are estimated to climb around 8% to $8.15 next year, reflecting an attractive valuation compared to the S&P 500. 

Furthermore, Pepsi's status as a Dividend Aristocrat with a consistent payout history spanning 51 years offers a 3% yield, increasingly appealing in the current falling yield environment.

Summary: Why Pepsi is a Buy

Considering PepsiCo's strategic diversification towards healthier products, anticipation of sales growth, expected rise in profit margins, and attractive valuation compared to the market indices, analysts' sentiments largely favor a positive outlook for the company.

The enduring nature of PepsiCo's business, coupled with its consistent dividend payouts, renders it an appealing asset for investors seeking growth and stability in their portfolios. If the company continues on its trajectory, potential gains of up to 12% to 21% might be achievable based on analysts' estimates and historical trading multiples.

PepsiCo appears positioned to rebound from the challenges of 2023, offering a compelling investment opportunity for those interested in a combination of growth potential and stability in the market.

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