Cabot Turnaround Letter Issue: October 29, 2025

PepsiCo (PEP): The Choice of Many Generations

It goes without saying that a big part of being a turnaround investor is having a contrarian bent. Let’s face it, we’re a hardy bunch who typically shun the crowd and buy what are, in most cases, stocks that are completely out of vogue with the typical market participant.

However, another aspect to turnaround investing that I think we all instinctively embrace is the concept of mean reversion; that is, the statistical theory that an asset’s price will eventually revert to its historical average over time. In the case of this month’s featured stock, my application of “mean reversion” isn’t so much a reference to a stock’s share price as it is to the idea of a reversion to the mean in consumer tastes—especially as it pertains to the long-term prospects for an established company.

The stock under focus is PepsiCo (PEP), the world-famous food and beverage giant. The company has been around for well over a century and is such a big part of American culinary and popular culture that it really needs no introduction.

While it’s most famously known for its iconic Pepsi Cola soda brand, the company has also grown its portfolio over the years to include other famous brands that millions consume on a daily basis—perhaps without even realizing Pepsi owns it. Among them: Gatorade, Mountain Dew, Lay’s, Cheetos, Quaker Oats and Tostitos, plus partial ownership and/or joint ventures with other major brands including Lipton, Tropicana and Starbucks.

Sensing that consumer tastes are changing, Pepsi has developed a strategic partnership with Celsius Holdings (CELH) to distribute Celsius products in the U.S. and Canada, with Celsius acquiring the Rockstar Energy brand in North America from Pepsi, and Pepsi recently increasing its ownership stake in Celsius to approximately 11%. (The latest investment also gained Pepsi a seat on Celsius’ board of directors.)

The Celsius partnership is a key to understanding not only where Pepsi is likely headed in the near-term, but also, I think, a pivotal consideration to what could be a longer-term reversion of consumer tastes away from energy beverages and back to classic sodas like Pepsi Cola.

Time certainly flies, and for those of us old enough to remember the 1980s, it’s hard to believe that over 40 years have gone by since the advent of the company’s highly successful advertising campaign of that era, “Pepsi: The Choice of a New Generation.” That campaign was built on seemingly ubiquitous TV commercials featuring hugely popular icons of the day, like Michael Jackson, which helped elevate Pepsi’s brand in the eyes of consumers. And while it didn’t propel Pepsi past its rival, Coke, in terms of overall market share, it significantly boosted Pepsi’s sales and narrowed the gap between the two competitors.

But that was then and this is now. In the decades since the glory years of the 1980s, Pepsi’s soda brand has obviously fallen out of favor to an extent, as younger consumers (especially Gen Z and Millennials) have a clear preference for energy drinks. And while classic soda still maintains significant popularity, particularly among teens, so-called “energy drinks” often win out for a stronger, faster caffeine effect that aligns with the fast-paced lifestyle of today’s younger crowd (with one recent survey finding that 45% of teens favor energy drinks for this purpose).

This doesn’t mean that Pepsi and its peers have fallen completely out of favor with younger Americans; it just means there’s a new kid on the block. It also explains why Pepsi’s market position conspicuously declined in recent years, especially since its 1980s peak. But it’s not just energy drinks that are putting pressure on the brand; recent reports show that Pepsi has fallen behind its long-time competitors Coca-Cola, Sprite and Dr. Pepper, slipping last year from its long-held number two position in the U.S. soda category to become “only” the fourth-most popular soda in the country.

What’s more, as a Business Insider article observed, “This trend reflects a broader, ongoing shift in American consumer preferences away from carbonated soft drinks, a broader decline that began in the early 2000s with increased awareness of obesity issues.” So, there’s potentially a health-related component to Pepsi’s slide (although I don’t believe this is the main issue, as I’ll explain).

But first, let’s return to the energy drink discussion. Goldman Sachs just published a research note that underlines what I see as the main issue at stake here. It noted that energy drinks continue to be the top seller at U.S. convenience stores in 2025, with America’s top energy drink makers all working to differentiate themselves through packaging, new flavors and an increased focus on female customers.

Goldman’s Bonnie Herzog identified several trends within the space that underscore the strength of the category and corporate strategies to entice consumers, stating: “It’s all about energy drinks again this year with Monster, Celsius, Red Bull and several others stepping up their game,” adding that demand remains “robust with retailers expected to add incremental space next year.”

She further highlighted the growth potential of the zero-sugar Celsius energy beverages (which Pepsi has a stake in) as having a particularly long growth runway—and now representing one-third of the total growth in the energy drink category.

This assumption, ironically, is one I believe will be upset by a long-term mean reversion scenario, contrary to consensus expectations. Consider that on a comparative cost basis, energy beverages are significantly more expensive than traditional sodas like Coke and Pepsi, especially when comparing the price per ounce.

What’s more, cans hold the largest market share for energy drink packaging. According to surveys, global revenue from canned energy drinks comprised 82% of the market in 2024, while in the U.S. cans accounted for a whopping 92%. In terms of comparative costs, the average cost per can for Pepsi Cola in the U.S. today is 57 cents (when purchased as a multi-pack). Single-can purchases vary by retail location, but tend to average around $1 (but can sometimes be as high as $2). By contrast, the average retail cost for a can of Red Bull energy drink can be anywhere from $3 to $4. (For Monster drinks, the nationwide average is around $3.)

And while bulk purchases of energy beverages via online and subscription channels (which offer consumers a discount) account for some of the total, most energy drinks are purchased by the can at retail outlets for on-the-go consumption. This is where an energy drink addiction can become prohibitively expensive over time—a key consideration as younger Millennial and Gen Z consumers report finding workforce entry to be increasingly difficult due to a combination of a cooling economy, decreased entry-level job postings and high competition.

Additionally, there’s the health factor to consider: not only do energy drinks typically contain more sugar than traditional sodas, they’re also more caffeinated. For instance, a 12-ounce serving of a regular soda has about 39-46 grams of sugar, while a 12-ounce serving of a typical energy drink contains roughly 41 grams of sugar (with Monster Energy drinks being especially noted for their high-sugar content).

In terms of caffeine content, sodas typically have 23–83 milligrams (mg) per 12-ounce can, with many falling in the 25–50 mg range. For the average energy drink, 80–300+ mg per serving is common, with some exceeding 300 mg! (Energy drinks are also often sold in larger 16-ounce cans, which can lead to even higher total caffeine intake.)

So, between the significant cost and health factor considerations, it doesn’t take much imagination to see an eventual trend shift away from high-sugar, high-caffeine and high-cost energy drinks and back toward the established soda brands like Pepsi. This is an especially pertinent consideration given the firm’s historical record for regaining favor with the public through strategic marketing and innovation whenever its popularity has slipped.

On that score, we’re already beginning to see a recognition among younger consumers of energy drinks that many of those beverages aren’t exactly healthy. Perhaps that explains the growing popularity of vitamin-infused, sugar-free energy drinks like Celsius, as well as the popularity of protein-infused snacks and beverages.

That brings us to the present situation for Pepsi. After slipping to the number-four spot among its major competitors in 2024, it has been undergoing a concerted operational turnaround effort. The company is focusing on streamlining operations, cutting costs innovating with new products (including protein-focused beverages and snacks) and re-evaluating its product portfolio and marketing to stay ahead of changing consumer trends.

On the snack front, it’s important to note that Pepsi’s shift of focus on this product category isn’t recent, but actually started in the 1990s, when it first began to move away from the “cola wars” to concentrate on its highly profitable snack food division, Frito-Lay.

More recently, as it innovates to address weaknesses in its core brands and enter new, growing categories, it’s developing new product lines, including a re-launch of its popular Muscle Milk (a protein-rich beverage line it acquired in 2019), as well as introducing a new Starbucks ready-to-drink coffee with protein and a protein powder under the Propel brand. (Pepsi obviously sees the fast-growing protein market as a major potential growth driver going forward, and it’s a big part of its current innovation and acquisition strategy.)

The company is also expanding further into zero-sugar, prebiotic and lower-sodium products. On this front, its Pepsi Zero beverage line—which contains slightly less caffeine than regular Pepsi but no sugar—is still popular and supported by recent marketing efforts, including campaigns like “Food Deserves Pepsi.”

It has also secured long-term partnerships with a growing number of major food purveyors, most notably with Subway, to provide these beverages. For instance, Subway recently began a 10-year agreement with PepsiCo for its U.S. beverage supply, replacing Coca-Cola. (And on a personal note, Pepsi Zero is the canned beverage of choice for yours truly, and I can vouch for its excellent taste compared to regular Pepsi.)

Further on the snack foods front, Pepsi also plans to rebrand some chips to highlight natural colors or the absence of certain dyes, as well as the option of healthier oils like avocado oil and olive oil for certain snacks, as part of its strategic plan to regain market share. The company is further looking to sharpen how it allocates resources, directing funds toward higher-margin categories and growth markets (many of which happen to be in the snack category).

A final consideration is the presence of a major activist investor, Elliott Management, which believes Pepsi’s valuation is “dislocated.” We discussed this in a recent newsletter, but I’m mentioning it again here since Elliott’s arrival on the scene is what I consider a key catalyst for the turnaround’s eventual success. As previously mentioned, Elliott bought a $4 billion stake in the company and is pushing for several changes, including spinning off bottling operations and cutting underperforming brands. (Of particular significance, Pepsi is reportedly the hedge fund’s largest equity position ever.)

In conclusion, I regard PepsiCo as both an intermediate-term opportunity thanks to its brand revitalization efforts and activist investor presence, as well as a long-term “reversion to the mean” play on what I see as a coming shift in consumer tastes and economic choices. As such, I recommend PepsiCo’s stock for participants with a medium-to-long-term outlook.

Recommendations

Purchase Recommendation: PepsiCo (PEP)

700 Anderson Hill Road
Purchase, NY 10577
Web Site: https://www.pepsico.com

Symbol: PEP
Market Cap: $208.7 Billion
Category: Large-Cap
Business: Food and Beverage
Revenues (2026e): $93.4 Billion
Earnings (2026e): $11.1 billion
10/29/25 Price: 152.60
52-Week Range: 127.60-173
Dividend Yield: 3.75%
Price target: 200

Background:

PepsiCo (formerly the Pepsi-Cola Company) fell out of favor with investors even before Pepsi’s widely publicized drop to fourth place among its soda beverage competitors last year.

The trouble began for the brand in 2023, which is reflected in the stock price peak at just under 200 per share earlier that year. From there, the stock embarked on a drawn-out decline over the next two years, eventually ending up at 125 in May—a loss of 38%.

However, it was shortly after this that the stock’s bear market finally ended, with Pepsi shares turning the corner during the spring months and rallying back to around the 155 a share level last month on the activist investor announcement. Since then, the stock price has been treading water as the market awaits the next developments in the company’s turnaround plan.

I consider the stock’s longer-term trajectory to be up, however, with the turnaround gaining traction as signs of stabilization and growth in its North American beverage division become apparent, along with recent revenue and earnings improvements and the addition of a new CFO.

Analysis:

PepsiCo’s recent Q3 earnings report was mixed, but it also contained reasons for optimism going forward.

While total volume for both food and drinks fell 1% during the quarter and operating profit was down 11% on a reported basis, total sales and organic revenue rose in the low-single digits year-on-year (led by strength in the Europe, Middle East and Africa segments), while earnings beat expectations.

In the earnings call, CEO Ramon Laguarta said the outfit’s top priorities are to “accelerate growth and aggressively optimize our cost structure,” which it intends to accomplish by “introducing a strong pipeline of innovation to accelerate portfolio transformation, continuously sharpening our price pack architecture to provide good value to consumers and right sizing our entire cost base to help fund our activities.”

Along those lines, Pepsi has a little-known venture capital supporting arm known as PepsiCo Ventures Group, which plays an important role in the firm’s growth, investment and innovation strategies within the food and beverage sector.

According to Seeking Alpha, the group’s main focus has been on “investing in early-stage and high-growth companies that align with PepsiCo’s broader strategies for sustainable, health-oriented and innovation-driven growth.” (Looking ahead, PepsiCo Ventures Group said it plans to continue to invest in early-stage and high-growth companies that align with the company’s broader strategies for growth.)

Financially, Pepsi’s top brass are guiding for low-single-digit revenue growth going forward, with an emphasis on the importance of cost optimization in order to further improve financial results. Management also expressed optimism for returning to long-term top-line growth targets in 2026, with Laguarta noting, “we see a clear line of sight to going back to algorithm throughout ’26.”

Consequently, a successful turnaround for Pepsi, in the words of one analyst, now depends “less on external demand recovery and more on internal execution.”

Another attraction for investors in Pepsi is the firm’s forward dividend yield, which is currently 3.75% (and 3.6% on a trailing twelve months basis), with an annual forward dividend of $5.69 per share. The company plans shareholder returns of $8.6 billion in dividends and stock repurchases for this year, and while it hasn’t yet mentioned any specific shareholder returns for 2026, its strategy aims to return to its long-term growth targets, which should enhance the overall financial performance and shareholder returns outlook for Pepsi.

In view of these considerations, I’m recommending that we add PEP to the portfolio with an intermediate-term upside target of 170, and with 200 being a reachable target in my estimation from a longer-term perspective. BUY

Other Ratings Changes:

We sold Helen of Troy (HELE) on October 13. SOLD

We also took a 50% profit in our position in UiPath (PATH) on October 9, with a Hold rating assigned for the remainder of the position. HOLD

The chief analyst of the Cabot Turnaround Letter does not yet personally hold shares of every company on the Current Recommendations List, but that will change over time subject to the following guidelines. The chief analyst may purchase securities discussed in the “Purchase Recommendation” section or sell securities discussed in the “Sell Recommendation” section but not before the fourth day after the recommendation has been emailed to subscribers. However, the chief analyst may currently hold and may purchase or sell securities mentioned in other parts of the Cabot Turnaround Letter at any time.

Performance

The following tables show the performance of all our currently active recommendations, plus recently closed out recommendations.

Notes to ratings:
1. Based on market capitalization on the Recommendation date.
2. Total return includes price changes and dividends, with adjustments as necessary for stock splits and mergers.
* Indicates mid-month change in Recommendation rating. For Sells, price and returns are as-of the Sell date.
*** GE total return includes spin-off value of GEHC shares at January 6, 2023 closing price to reflect our sale.
**** Indicates a partial sell.

Most Recent Closed-Out Recommendations

The next Cabot Turnaround Letter will be published on November 26, 2025.

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