PepsiCo’s 13.3% return over the past six months has outpaced the S&P 500 by 7.7%, and its stock price has climbed to $160.59 per share. This was partly thanks to its solid quarterly results, and the run-up might have investors contemplating their next move.

Is now the time to buy PepsiCo, or should you be careful about including it in your portfolio? Check out our in-depth research report to see what our analysts have to say, it’s free.

Why Is PepsiCo Not Exciting?

We’re happy investors have made money, but we're swiping left on PepsiCo for now. Here are three reasons there are better opportunities than PEP and a stock we'd rather own.

1. Demand Slipping as Sales Volumes Decline

Revenue growth can be broken down into changes in price and volume (the number of units sold). While both are important, volume is the lifeblood of a successful staples business as there’s a ceiling to what consumers will pay for everyday goods; they can always trade down to non-branded products if the branded versions are too expensive.

PepsiCo’s average quarterly sales volumes have shrunk by 2.1% over the last two years. This decrease isn’t ideal because the quantity demanded for consumer staples products is typically stable.

2. Projected Revenue Growth Is Slim

Forecasted revenues by Wall Street analysts signal a company’s potential. Predictions may not always be accurate, but accelerating growth typically boosts valuation multiples and stock prices while slowing growth does the opposite.

Over the next 12 months, sell-side analysts expect PepsiCo’s revenue to rise by 4.8%. Although this projection indicates its newer products will catalyze better top-line performance, it is still below average for the sector.

3. Shrinking Operating Margin

Operating margin is a key profitability metric because it accounts for all expenses enabling a business to operate smoothly, including marketing and advertising, IT systems, wages, and other administrative costs.

Looking at the trend in its profitability, PepsiCo’s operating margin decreased by 1.8 percentage points over the last year. This raises questions about the company’s expense base because its revenue growth should have given it leverage on its fixed costs, resulting in better economies of scale and profitability. Its operating margin for the trailing 12 months was 12.2%.

Final Judgment

PepsiCo isn’t a terrible business, but it doesn’t pass our bar. With its shares outperforming the market lately, the stock trades at 19× forward P/E (or $160.59 per share). This valuation is reasonable, but the company’s shakier fundamentals present too much downside risk. We're pretty confident there are more exciting stocks to buy at the moment. Let us point you toward the Amazon and PayPal of Latin America.

Stocks We Would Buy Instead of PepsiCo

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