PEPSICO INC (PEP) stock intrinsic value fair value estimate & owner earnings analysis

PepsiCo sells snacks and drinks: Lay's, Doritos and the rest of the Frito-Lay line, Quaker foods, and beverages including Pepsi, Gatorade, Rockstar and, since 2025, poppi. It reports six segments: PepsiCo Foods North America, PepsiCo Beverages North America, International Beverages Franchise (which includes SodaStream), Europe/Middle East/Africa, Latin America Foods and Asia Pacific Foods. In 2025 revenue was $93.9 billion. 56% came from the United States and 44% from abroad, with Mexico, Russia, Canada, China, the United Kingdom, Brazil and South Africa together contributing 25%. How we measured earnings. We start from operating cash flow. We take out working-capital swings and stock-based pay, and deduct the capital spending needed to keep the business where it is. Spending that matches revenue growth, at the company's ten-year average of 5.5% of revenue, is treated as investment rather than upkeep. On that basis owner earnings per share were $4.44 in 2016, $5.07 in 2017, $3.53 in 2018, $4.12 in 2019, $4.73 in 2020, $4.66 in 2021, $4.71 in 2022, $5.90 in 2023, $6.04 in 2024 and $6.66 in 2025. Non-cash charges are added back: the 2022 impairment charges, the 2025 Rockstar impairment and the 2022 gain on selling the juice business. Cash restructuring and deal costs are left in as real costs, because PepsiCo restructures every year. Two adjustments matter. First, cash flow in 2018-2025 carried installments of a one-time 2017 tax-reform charge on foreign earnings ($772 million in 2025). The 10-K says the last installment, $965 million, is due in 2026. We add these payments back to ongoing earnings and instead count the $965 million as a debt. Second, we value the business before interest ($1.75 billion paid in 2025) and subtract the debt separately. The starting level. Before interest and the transition tax, the business generated $7.14 per share in 2023, $7.61 in 2024 and $8.49 in 2025. We anchor on $7.61, the median of the three years since the post-2021 price increases set today's revenue base. A check agrees: the ten-year median cash margin of about 11% of revenue, applied to 2025 revenue, gives about $7.52. We do not anchor on 2025 because it was helped by a capital-spending cut ($4.4 billion against $5.3-5.5 billion in 2023-2024). The cut continued in the first half of 2026 ($1.27 billion against $1.51 billion), but two periods are not enough to reset the level. Growth. Cash earnings rose about 11.6% per share in 2025. Our base case assumes only 2.5% for 2026 and each year after, despite a firm first half of 2026 (revenue $43.6 billion, up 7.3%, helped by the poppi and Siete acquisitions). The reason is volume. In 2025 North American snack volume fell 2% (savory snacks down 3%), beverage volume fell 3%, and U.S. revenue has been flat at about $52 billion since 2023. Recent growth has come from price, not from more product sold. The 10-K also names weight-loss drugs such as GLP-1 medications as a risk to demand. We credit only what the record supports: decades of passing cost increases through to prices on brands that have lasted generations. We do not credit buybacks or acquisitions as growth, because both are paid for out of the cash we already count. We also give no credit to new products or to volume recovering. Bear case ($79.51). Cash margins fall back to about 10% of revenue, the level of the weaker years 2018 and 2021, and the Russian business (about $4.8 billion of 2025 revenue) is lost. That leaves about $6.50 per share, and it never grows: price increases only offset falling volume, tariff costs (6 points of cost inflation in North American beverages in 2025) and further write-offs of acquired brands like the 2025 Rockstar impairment. The business is worth about $149 billion ($108 per share). It owes about $39.6 billion ($28.82 per share), leaving $79.51. Even here cash flow covers interest about five times. Base case ($157.43). $7.61 grows 2.5% a year for ten years, then 1.5% a year after that on pricing power alone, net of volume erosion. The business is worth about $256 billion ($186 per share), less the same $39.6 billion of net debt, leaving $157.43. Bull case ($226.69). The lower capital spending holds, so the level is 2025's $8.49. Pricing plus productivity savings lift cash earnings 4% a year for ten years. That is below the roughly 5% the business achieved from 2016 to 2025, part of which was bought through acquisitions. Growth is 2% a year after that. The business is worth about $351 billion ($256 per share), less the net debt, leaving $226.69. Debt. Borrowings were $49.2 billion at year-end 2025, mostly fixed-rate notes at about 2-4.6%, including $26 billion due 2031-2060. The 10-K puts their market value at $46 billion. We use the $46 billion figure. Measured against our 6% yardstick, those low coupons would shrink the debt figure even further, so this is conservative. From that we deduct cash and short-term investments of $9.5 billion, less about $2 billion kept for operations. We then add the $965 million final tax installment and $141 million owed to minority partners, for net debt of $39.6 billion. No maturity or covenant threatens any case. Changes since our previous analysis. Our earlier estimate ($62 base) used higher, case-specific discount rates. It also subtracted all debt from cash flows that were already after interest, which counted the debt twice, and charged all capital spending, including spending for growth, as upkeep. This analysis uses one 6% rate for every case and counts debt once. It separates the one-time tax installments from ongoing earnings and keeps growth assumptions lower than before (2.5% base instead of 4.5%). The higher values come from these corrections, not from a brighter outlook. What could make this wrong. Volume declines could deepen enough that price increases no longer hold cash earnings flat. The working-capital outflows of 2024-2025 ($1.5-1.6 billion a year) may be partly permanent: charging the ten-year average would trim the starting level by about $0.22. More acquisitions could be written off. Margin-of-safety price ($85). The margin-of-safety price targets a 20% annual return. At $85, the base case implies that the dividend (currently $1.48 a quarter) plus a move toward the base value over about five years compounds near 20%. From that price the bear case implies a modest gain. Because roughly two-thirds of the base value lies beyond year ten, we set the price close to the bear value rather than at a discount to the base.