PepsiCo Stock Hits Widest Discount to Coca-Cola in 25 Years

Summary

• PepsiCo trades at its steepest discount to Coca-Cola in more than 25 years, The Wall Street Journal reported.
• Elliott Management bought a $4 billion stake last year; the turnaround has yet to deliver results.
• Analysts and fund managers are pressing for structural change, including a possible bottling or beverage separation.

The latest

PepsiCo's stock is down roughly a third from its 2023 peak and now trades at its widest valuation discount to Coca-Cola in more than 25 years, according to The Wall Street Journal. The company cut its profit outlook for the second time this year, and chief executive Ramon Laguarta conceded on this month's earnings call that Pepsi is not competing well in soft drinks.

Details

• The snacks problem: Pepsi tried to revive North American snacks with price cuts, new products and heavier marketing, the Journal reported. Volumes edged up last quarter, but the unit's operating profit fell 13%, and the company now plans to raise some prices again.
• The drinks problem: Beverage volumes fell 2% in the latest quarter. The Journal separately reported that KFC struck a deal to replace Pepsi with Coca-Cola at thousands of its U.S. restaurants. Strong international sales cushioned the damage but did not prevent the guidance cut.
• The activist stake: Elliott Management bought a $4 billion stake last year and pushed Pepsi to streamline its North American snacks and beverage businesses. A year on, the Journal reported, the turnaround has yet to deliver, and the problem may run deeper than a few weak brands.
• Losing a growth category: Coca-Cola's Fairlife protein line grew sales 78% year-over-year while Pepsi's Muscle Milk fell 16%, per Evercore ISI's analysis of Circana data. Coke now holds nearly a quarter of the protein-shake category against Pepsi's 3%.
• The Poppi disappointment: Pepsi bought the prebiotic soda brand Poppi for nearly $2 billion. It now expects to pay almost none of the $300 million bonus promised to the sellers if the brand hit its performance targets, according to the Journal.
• Analyst pressure: Barclays's Lauren Lieberman called the plans tactical on the earnings call, and Jefferies's Kaumil Gajrawala pressed for clarity on pricing. TD Cowen's Robert Moskow wrote that he continues "to struggle with the slow progress and lack of transparency on major strategic priorities."
• Investor verdict: David Wagner of Aptus Capital Advisors said the status quo will not work. GMO's Tom Hancock, who owns Coca-Cola but not Pepsi, still calls it a quality company but questioned whether it is a great stock given the structural challenge facing much of the business.
• The structural argument: Coca-Cola outperformed partly by handing bottling back to independent operators and focusing headquarters on brands. Pepsi still runs Frito-Lay, a U.S. drinks business with its own trucks and warehouses, and a fast-growing international arm.
• Options on the table: The Journal cited divesting North American Quaker, refranchising U.S. bottling, or separating beverages through a sale or spinoff, possibly combining with Keurig Dr Pepper's soon-to-be stand-alone soda unit. Laguarta said Pepsi is open to revisiting every option without naming one.
• The sector backdrop: Shoppers are trading down to store brands and shifting toward healthier foods as weight-loss drug use rises. Evercore's David Palmer found nearly every large food company is losing share. General Mills is also struggling; Kraft Heinz shelved its planned split in February.

Background

Pepsi has long resisted breaking itself up, arguing that keeping snacks and drinks together strengthens both. Laguarta has led the company since 2018 and been chairman since 2019. Coca-Cola absorbed years of margin pain before shedding its North American bottling, ultimately gaining higher margins and sharper focus.

Between the lines

The Journal's argument rests on the valuation gap it documents: a snacks company built around Frito-Lay and the international food arm would resemble Mondelez, trading near 19 times forward earnings against Pepsi's 14. Management's steps look contradictory — exploring handing off bottling in some regions while testing merged snack and drink delivery in Texas.

What's next

Watch whether Pepsi names a specific structural option rather than restating openness, the outcome of the Texas delivery test, the next quarterly guidance update, and any decision on North American Quaker or U.S. bottling refranchising.

Source: The Wall Street Journal