PepsiCo hits the GLP-1 firewall

Key points

• Cost controls boost EPS: PepsiCo's Q3 earnings per share (EPS) grew 3% year-over-year to $2.31, despite a miss on organic revenue growth (1.3% vs. 3% estimated), thanks to strong cost control measures. This short-term strategy helped profitability but raises concerns about long-term growth potential.
  
  
• Obesity drug impact: The company is not addressing the potential long-term impact of GLP-1 drugs on the consumption of sugar and processed foods, which is a key risk as these medications are increasingly used to combat obesity, leading to reduced demand for PepsiCo's core products.
  
  
• Long-term structural headwinds: PepsiCo’s reliance on cost-cutting over investments could lead to declining growth, especially in light of falling U.S. obesity rates and structural challenges in the food industry, further amplified by the rise of obesity drugs. Investors are cautious about the long-term viability of this strategy.

PepsiCo beats on EPS as cost control is favoured over investments

PepsiCo reported Q3 results this Tuesday with shares gaining despite a miss on organic revenue coming in at 1.3% YoY vs est. 3%. Through effective cost controls PepsiCo was able to deliver earnings per share of $2.31 up 3% YoY. I still don’t get why investors are willing to reward PepsiCo for these results. Organic revenue growth is one of the key shareholder value drivers and this factor is deteriorating fast at PepsiCo. The stock’s total return has underperformed both the S&P 500 consumer staples sector and the S&P 500 Index over the past five years indicating that the business is structurally facing headwinds.

“Our businesses remained resilient in the third quarter, despite subdued category performance trends in North America, the continued impacts related to certain recalls at Quaker Foods North America and business disruptions due to rising geopolitical tensions in certain international markets. Strong cost controls aided our profitability, as we made incremental investments to improve our marketplace competitiveness,” said Chairman and CEO Ramon Laguarta.

This statement is worrying for several reasons. One, the company is completely silent about the GLP-1 drugs impact on obesity rates in the US and thus consumption of sugar and processed foods. This is a red flag when a management is not recognizing obvious threats to the business. The other worrying part of the statement is that PepsiCo’s management has chosen the path of cost controls to mitigate weak demand which can be okay in the short-term, but if it becomes longer term strategy it will lead to relative growth decline and shareholder value destruction down the road. If I was an investor in PepsiCo I would seriously consider the investment case again.