Pepsico Inc

PepsiCo is a strong business, but at today's price the shares sit above our base-case value.

PepsiCo makes snacks such as Lay's, Doritos and Cheetos, and drinks such as Gatorade, Pepsi and Mountain Dew, and it sells in more than 200 countries and territories. Revenue was $93.9B in the year to 27 December 2025, and return on invested capital (the after-tax profit earned on all the money lent to and invested in the business) was 16%. On quality, the record is strong: there were 0 loss years across 15 years of filings, and operating margin averaged 14%. On price, the shares were $133.57 against a base-case value of $77.92 per share, which gives a margin of safety of -71% on our numbers, so our research status is strong business, demanding price.

PepsiCo makes and sells snacks such as Lay’s, Doritos and Cheetos, and drinks such as Gatorade, Pepsi and Mountain Dew. It sells drink concentrate to independent bottlers, who mix and sell the finished product, and it also runs its own bottling plants and distributors in some markets. Revenue was $93.9B in the latest year, and return on invested capital (the after-tax profit earned on all the money lent to and invested in the business) was 16%.

• Brand strength and effective net pricing across snacks and drinks
• Volume sold through company bottlers, independent bottlers and distributors
• Acquisitions such as Sabra and poppi, which add new brands
• Productivity savings that offset rising commodity and packaging costs

Inside the circle? We rate this medium. Profit has not made a loss in any of the 15 years of filings, and operating margin has stayed close to its average, which is the record Buffett looks for. Demand is exposed to sugar taxes, changing shelf space, weight-loss drugs and private label, and the latest year showed profit falling, so a careful owner would still find the ten-year picture uncertain.

The protection here looks like brand and trademark strength rather than a structural barrier such as a licence or a monopoly. The filing says the company's brands, innovation and distribution let it compete effectively, and it describes its trademarks as essential to its worldwide businesses. Gross margin has averaged 54% with little swing (0.7% volatility), and operating margin averaged 14%, which is the kind of stable result a brand-led pricing position would produce. But the latest operating margin fell to 12%, and the filing describes falling organic volume and retailers shifting shelf space towards private-label brands. We would call the durability narrow rather than durable, because the protection depends on continued marketing spend and on shoppers staying loyal to the brands. Returns on capital are high (20% average), but 2.3× debt to equity means part of the return on equity is borrowed, so the equity numbers alone do not show the moat cleanly. The filing excerpts do not include gross margin or market share history, so those points rest on the figures supplied to us rather than on the filing text.

We rate capital allocation as questionable. The diluted share count has shrunk on average, shown by -0.6%, and profit has been paid out as dividends at an average payout of 74%. Borrowing has grown, with total debt of $46.4B and debt to equity of 2.3×, and the filing says net interest expense rose on higher average debt balances. Some acquisitions have weighed on results: the latest annual report cites impairment charges on the Rockstar brand and acquisition charges tied to poppi. On candour, the filing is detailed about risks and admits the fall in profit, but it leans on adjusted measures and the excerpts we have do not include buyback amounts or dividend history, so we cannot test those claims.

• The share count change averages -0.6% a year, which means each remaining share holds a slightly larger part of the business.
• Dividends take a large share of profit, at an average payout of 74%, which leaves less cash for reinvestment, although retained earnings still total $21.5B.
• The latest report cites impairment charges on the Rockstar brand and acquisition charges for poppi, both of which weighed on operating profit.
• Total debt stands at $46.4B, with a debt payback of 6.0 yrs and interest cover of 10×, so the balance sheet has less room for error than a debt-free business.

• FailsMargin of safetyFails

  At $133.57, the price is above the base-case value of $77.92 (the bear case is $34.09), so there is no margin of safety (-71%). The standard lens asks for 25%.

  Why this test
• MixedHigh returns on equity without leverageMixed

  Return on equity averaged 55%, reaching 15% in 10 of the years measured; the weakest year was 43%. Debt is high enough that some of that return is borrowed.

Buffett's tests favour the business more than the price. Our tests find consistent earning power, with operating margin varying little around its average, and a high return on invested capital. The owner earnings test passes: normalised owner earnings are $7.8B, and free cash flow has averaged 89% of reported profit. The retained earnings test also passes, with each retained dollar matched by 1.5× of market value. Pricing power, which Buffett called the single most important decision in judging a business, is the open question. The filing says "When prices increase, we may or may not pass on such increases to our customers", and the latest year showed organic volume falling. Debt is the second concern. Total debt is $46.4B, which would take 6.0 yrs to repay from normalised owner earnings, so our little debt test is mixed even though interest cover is 10×. Return on equity averaged 55%, but debt to equity of 2.3× means part of that return is borrowed, which Buffett's standard of little or no debt would question. The margin of safety test fails. Interest rates act as gravity on value: the owner earnings yield of 4.2% sits below the ten-year Treasury yield of 5.2%.

• Organic volume and effective net pricing in the next annual report

  Pricing power decides the case, and falling volume shows whether price increases are holding.

• Operating margin compared with its historical average

  The latest year fell well below average, and a recovery would ease the question about lasting earning power.

• Total debt, net interest expense and debt payback

  Net interest expense rose on higher average debt balances, and the payback period sets the debt test.

• Impairment charges on acquired brands

  The latest annual report cites impairment charges related to the Rockstar brand and acquisition charges for poppi, which suggests some purchases are worth less than was paid.

• Share count and buyback amounts

  The share count has shrunk slightly, but the excerpts do not show repurchase amounts, so Buffett's test of buying below intrinsic value cannot be checked.

Questions the filings couldn't answer

• How much of the latest fall in profit is one-off charges, and how much reflects lasting pressure on volume?
• Can the brands keep their shelf space as large retailers push private-label products?
• Which set of assumptions is most reasonable, given a bear-case value of $34.09 and a bull-case value of $139.70?