PepsiCo Faces GLP-1 Pressure Amid Elliott Overhaul

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Investor Pressure Mounts Ahead of Earnings

PepsiCo is running short on time to achieve the growth and profitability objectives it outlined after Elliott Investment Management took an approximately $4 billion position a year ago, as concerns over the impact of GLP-1 weight-loss drugs on salty snacks and sugary beverages intensify.

When PepsiCo reports quarterly results on Thursday, investor attention will center on its key North America division. That business has been hit by shrinking volumes as CEO Ramon Laguarta contends with higher input costs linked to the Iran war and persistent inflation that is weighing on consumer demand.

The company has pursued what it calls record productivity savings and introduced price cuts of up to 15% in February on products including Lay’s and Doritos. Even so, PepsiCo’s core operating margin in the first half stood at 16.3% of revenue, 15 basis points below the same period a year earlier.

This trend runs counter to the December commitment to improve core operating margin by 100 basis points over three years, a target unveiled following talks with Elliott.

“They have not identified a focused path to recovery in the face of the ’changes’ that they’ve made. They were simply too late, and now they have the threat of GLP-1s,” said Stephanie Link, chief investment strategist at PepsiCo investor Hightower Advisors.

Elliott and PepsiCo did not respond to requests for comment on this story.

GLP-1 Drugs Reshape the Packaged Food Landscape

The rise of GLP-1 weight-loss medications has pushed packaged food makers, including Kraft Heinz and Conagra Brands, to roll out healthier and reformulated offerings. PepsiCo has joined that shift with innovations such as Doritos Protein, SunChips Fiber and Good Warrior beef sticks.

Nevertheless, the perceived long-term risk from GLP-1-driven changes in eating patterns continues to pressure sector valuations. For PepsiCo, whose portfolio spans a wide range of processed snacks and carbonated drinks, enterprise value – including debt – has declined to 10 times EBITDA, compared with 18 times in mid 2022. Its more narrowly focused rival Coca-Cola has outpaced it over that period.

For investors, the key issue is whether PepsiCo can stabilize and grow volumes again, said David Wagner, head of equity and portfolio manager at PepsiCo investor Aptus Capital Advisors.

PepsiCo’s share price has fallen nearly 12% so far this year and is down about 16% since Elliott invested.

“Investors want two things: beverage pricing power that keeps pace with Coke, and signs that unit volumes and margins in North American snacks have stopped sliding,” Wagner said.

North America Snacks Strategy Under Scrutiny

TD Cowen analyst Robert Moskow said the most significant concern is the gap between PepsiCo’s efforts and actual performance in its U.S. Frito-Lay business. The company has invested heavily in that unit through pricing moves, product launches, expanded distribution and stepped-up marketing.

“The biggest issue, said TD Cowen analyst Robert Moskow, is that the enormous effort PepsiCo has put into its US Frito-Lay business, including price adjustments, new products, distribution expansion and more marketing, has fallen far short of their expectations.

“Sales remain flattish, and they’re losing market share,” Moskow said.

Third-Quarter Expectations and Pricing Pivot

Analysts forecast that PepsiCo will report a 4.3% year-on-year increase in third-quarter revenue to $24.96 billion on Thursday. Adjusted earnings per share are projected to rise 0.21% to around $2.29, according to data compiled by LSEG.

UBS analyst Peter Grom expects any improvement in the North America business to be incremental. He noted that PepsiCo’s recent move to raise prices on some U.S. chip products in line with inflation likely represents a strategic shift following earlier cuts.

“The North America improvement is likely to be gradual, said UBS analyst Peter Grom, and the pricing pivot — a move last month to raise some US chip prices with inflation — probably does make some sense.

“If you are not going to get the volume uplift from lowering price, then I think it makes sense to kind of have more of a normal cadence of pricing.”

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