PepsiCo Confronts Currency and Tariff Pressures in Defense of Flat EPS Goal

What happened

PepsiCo is actively battling significant currency swings and rising tariff costs that threaten its target of maintaining flat EPS for 2025, as highlighted in recent analysis. The company is relying on cost-cutting measures and smarter sourcing strategies to counter these external headwinds, which compound existing challenges like North America volume softness and non-cash impairments. Recent $1.9B impairments in 1H25 for brands such as Rockstar and Be & Cheery, though non-cash, signal underlying operational strains amid a volatile macroeconomic environment. PepsiCo's durable free cash flow and consistent dividend increases provide a buffer, but FX exposure on 44% of revenue outside the U.S. amplifies risks to earnings stability. Management's execution of productivity plans and international expansion must now navigate intensified currency and tariff drags to uphold investor confidence.

Implication

Currency volatility and tariff costs directly threaten PepsiCo's profitability, particularly given its substantial international revenue exposure, potentially derailing the flat EPS target for 2025 and pressuring the BUY thesis. The company's cost-cutting and productivity initiatives, while robust, may not fully offset these external shocks if they persist or worsen, leading to margin compression and reduced free cash flow generation. PepsiCo's strong capital return framework and dividend track record offer downside protection, but sustained FX headwinds could dampen investor sentiment and necessitate a reassessment of the current valuation discount to Coca-Cola. Key areas to watch include quarterly FX sensitivity, progress on the extended productivity plan through 2030, and any escalation in tariff policies affecting sourcing costs. Failure to manage these pressures effectively could shift the investment stance from BUY to HOLD, especially if North America volume recovery stalls amid broader economic uncertainties.

Thesis delta

The recent focus on currency and tariff pressures reinforces existing risks in the BUY thesis, emphasizing the need for vigilant monitoring of PepsiCo's cost management and international execution. While the core strengths of durable cash flow and moat advantages remain intact, heightened external headwinds could temper conviction if not adequately mitigated. No immediate stance change is warranted, but investors should prioritize updates on FX hedging and tariff impacts in future disclosures.