PEP - PepsiCo And Monster: Diving Into Human Behavior

2024-01-15 07:30:03 ET

Summary

• GLP-1 weight-loss drugs have little impact on snack companies like PepsiCo, as consumer habits tend to revert to familiar dietary choices.
• Monster Energy could see increased demand as weight-loss drugs decrease calorie intake and increase the need for alternative energy sources.
• The emergence of GLP-1 drugs is reshaping the pharmaceutical industry and consumer markets, with potential for increased sales and market growth.

Investment Thesis

In this article, I explore how GLP-1 weight-loss drugs, from Eli Lilly ( LLY ) and Novo Nordisk ( NVO ), have impacted people and external industries. While partly discussing the significance of these drugs in the obesity management field, the predominant aspect of the article will emphasize their influence on the beverage market. For instance, I believe PepsiCo ( PEP ) will sustain its market sales in the snack division due to consumer habits, even though there was an initial fear that weight loss drugs would significantly impact snacking behaviors; it caused a pretty fair decline in the stock price, so I think that is a security to consider. Moreover, Monster Energy ( MNST ) could see a spike in demand as these drugs increase the need for alternative energy sources due to a lack of calorie intake from a suppressed appetite. Throughout this entire piece, you will find that I connect an analysis that definitely highlights the importance of these GLP-1 drugs, but also their tie to consumer spending and lifestyle choices across the specified industries.

PepsiCo: Buy Rating

Monster Energy: Buy Rating

Introduction

PepsiCo

PepsiCo, a prominent global food and beverage company, offers a diverse range of products including snacks, beverages, and more. Known for brands like Pepsi, Mountain Dew, Lay's, Gatorade, Tropicana, and Quaker Oats, the company serves both developed and emerging markets. Focused on innovation, PepsiCo adapts to evolving consumer preferences, increasingly prioritizing healthier options and responding to health consciousness trends. The company actively works to reduce its environmental impact with initiatives aimed at minimizing plastic usage, conserving water, and lowering greenhouse gas emissions. These efforts demonstrate PepsiCo's dedication to sustainable practices while maintaining quality and safety in its product range.

Monster Energy

Monster Energy Company specializes in producing and distributing energy drinks, primarily known for its flagship product, Monster Energy. Their diverse range caters to a wide audience, including athletes, students, and professionals seeking an energy boost. With a significant market presence, Monster's products are easily accessible in stores and vending machines worldwide. The company is also known for its active marketing, particularly through sponsorships in sports and music events, reinforcing its image as a brand associated with high energy and an active lifestyle. Additionally, Monster Energy stays attuned to consumer trends, continually introducing new flavors and formulations to meet changing tastes in the energy drink sector.

Americans Still Have The Same Bad Habits

Firstly, I will give a broad context of the GLP-1 drugs in order for you to connect my thesis to the external industries of PepsiCo and Monster Energy. So, to begin with, Eli Lilly and Novo Nordisk have created the most popular weight loss drugs on the market. These drugs mimic a hormone that slows digestion and helps people feel full for longer. Despite high demand, their high prices and limited production, especially for Wegovy, have restricted accessibility for many potential users.

With that info, let’s move to some more substance. The recent study on tirzepatide, the active compound in weight loss drugs Mounjaro and Zepbound, hints at a glimpse on the long-term management of obesity. I am deeply interested in the pharmaceutical sector, and found this development particularly significant for weight loss drug companies. The study was funded by Eli Lilly, which tracked 670 individuals over a period. It provided amazing insights into the drug's success and the overall challenges of weight management.

To me (and I'm sure to others), the results were eye-opening. To further explain the study, it was discovered that participants who continued tirzepatide for an additional year after the first 36-week period saw further weight loss; it equated to an additional 5.5% reduction average. But, what I really looked into, was that those who switched to a placebo experienced a weight gain of 14% on average. This is a huge difference and promotes the effectiveness of Eli Lilly's tirzepatide, but on the contrary, it also notes the potential need for long-term, perhaps lifelong, medication to maintain weight loss. We can then conclude that this ongoing need and dependency of the drugs could impact the market demand astronomically, benefiting Eli Lilly and Novo Nordisk among others, like Pfizer ( PFE ).

I do want to analyze how I think the study is concerning, because I found this in a couple aspects. The dropout rate due to side effects like nausea and gastrointestinal issues cannot be overlooked. It was marked that 53 of the 670 people in the study had these effects that must've been severe enough for them to discard the drug entirely. This fact could deter interested users and limit the reach of the drug's potential. Personally, after reading and reading I don't believe this is a long-term drug to be used the rest of your life. I could see cycles of utilizing the drugs (because we know that many patients regain the weight). Then I think to myself, how many so-called 'cycles' could a human take. The repetitive and dramatic shifts in weight loss and re-gaining could be a health risk in itself-- just food for thought. But moreover on the risks, the high cost of Zepbound – over $1,000 a month – and the inconsistent insurance coverage pose the barriers we speak of in regards to accessibility. This financial burden, coupled with the current supply challenges, might negatively impact the adoption rate of these drugs. However, in rebuttal, I think that many investors are taking their profits because of these risks, which is truly pinpointing my buy thesis. A solid entry point is an investor's dreams, because that is where you make your money. And to me, I am optimistic there will be more insurance coverage because of the attention and more investments into higher production facilities to fulfill demand (therefore lowering supply costs, too) in 2024.

Despite these challenges, the study's facts and insights for long-term obesity management are profound. Obesity, often a chronic condition, requires sustained intervention, and tirzepatide presents a promising tool in this ongoing battle. I found the study to be a landmark in understanding obesity treatment. It most definitely illustrated the drug's role in effective weight management but also found some of the challenges that come with it.

Buy PepsiCo: GLP-1 Drugs Have Little Impact On Snack Companies In Reality

Now I would like to comparatively analyze the industries that I believe are positively impacted by GLP-1 drugs. Based on the study's findings from the New York Times on tirzepatide, the data suggests that weight loss drugs don't necessarily change long-term consumer behavior (even though the drugs are very effective). I thought it was relevant to PepsiCo because many analysts believe that, since they are a leading giant in the snack industry, they are going to be negatively impacted by the drug. While I think there is an aspect of truth, like due to the loss of appetite, a person will be eating less. But think about what they will be eating. Even though they will eat less while on the drug, people will continue to eat what they enjoy. Why would they change their diet? From the study we learned a major thing about consumer habits: the tendency to continue/revert to familiar dietary choices.

PepsiCo has a wide range of snack products and I illustrate a buy rating because of the benefit, or unchanged factor for that matter, from this consumer behavior pattern. Weight loss drugs are temporary solutions to losing weight because we know that people will simply regain the weight. And the likelihood of people returning to their habitual snack consumption once off the medication is high. This "seasonality" in the effectiveness of weight loss drugs illustrate the minimal long-run impact on snack consumption, which would directly correlate to PepsiCo's sales. I believe there was a market overreaction to the drugs making a dent to sales. But as we zoom out and look at the bigger picture, I think it's time to buy Pepsi because of the slight impact that GLP-1 Drugs will actually have, based on this data. To me, the best way to depict this weight management style was the 'cycle.' So from my understanding and analysis, the loop will always circulate because people prefer sugar and carbs, equating to snacks. To say the least, I think there will be a stable demand for PepsiCo's products, and the fearful sell off due to an assumption of decreasing sales was dramatic.

Furthermore, considering the challenges associated with long-term medication adherence and the financial burden of weight loss drugs, many individuals might opt not to use these drugs consistently. This scenario would further reinforce the likelihood of sustained snack consumption. But I even like that PepsiCo has a diverse portfolio, which includes healthier snack options. These advertising techniques could cater to those on the drug to snack on something they love 'in a healthier alternative.' This positions the company to cater to a wide range of consumer preferences and needs.

In light of these considerations, I rate PepsiCo a buy. With the company's market presence and little impact of weight loss drugs on snacking consumption, I suggest that PepsiCo will continue to thrive. The human behavioral patterns in regaining weight should play a large role in understanding the sustained growth for PepsiCo in the snacking lens.

Buy Monster Energy: They Need Their Fuel

With this continuing thought of demand amongst weight-loss drugs, I especially think the energy drink stocks, like Monster Energy, will benefit greatly. I see the connection to be vivid and quite intuitive. These drugs assist individuals in losing up to 20% of their body weight by suppressing their appetites. Therefore, we conclude that there is a major decrease in calorie consumption while being on the drug. So let's dive into why this shift is critical for Monster Energy's market potential.

According to a recent survey sent out to consumers, which was conducted by analysts at Stifel, it was found that 15% of the respondents are already using GLP-1 drugs, with an additional 21% showing interest. Like we said, these GLP-1 drugs are supposed to reduce appetite, and that then lowers calorie intake, but we need to be energized in some way if we are not eating solids. I would like to note that appetite is defined by the desire to eat food items, usually due to hunger. With that, we must be replenished in some way, and liquids aren't associated with appetite so that is a solution (I wanted to clarify why liquid intake is not suppressed as this is a common mistake in conversation). Further, Stifel estimates a 4% reduction if 16% of the U.S. population starts using these drugs. And here's where Monster Energy comes into the picture. The survey found that individuals on GLP-1 drugs are 72% more likely to consume an energy drink at least once a month compared to the general population. I feel like that is self-explanatory because people need energy from some type of source, so some may choose these caffeinated drinks. Therefore, this reflection illustrates a growing need for energy supplements due to reduced calorie intake.

This trend is a potential goldmine for Monster Energy that I don't think many people are noticing. The survey indicated that 86% of GLP-1 drug users purchased an energy drink at least once, significantly higher than the 50% in the overall population. And I think it is the perfect time to note that I recently analyzed Celsius Holdings (CEHL) and wrote on this very topic of GLP-1 drugs positively impacting the energy drink sector, but in context of Celsius and with different data. I highly recommend you check it out if this cross-industry analysis interests you.

Continually, with the survey in mind, Stifel projects a 2% increase in U.S. energy drink consumption, if more people start taking GLP-1 drugs. I think that is a fair forecast and believe fully that Monster Energy will be one of the first affected in the sector, mainly because of the near 30% market share . In my opinion, this correlation between the rise of GLP-1 drugs and increased energy drink consumption (converting to increased sales) is a key reason to be bullish on Monster Energy. The company is in a great position to capitalize on this unique market dynamic. I find it fascinating the impact a pharmaceutical trend can have on energy drinks. With growth in the GLP-1 drug market, the potential for Monster Energy's market growth is very much correlated. The rise in demand due to a need in daily energy, makes this an attractive investment opportunity.

Valuation

PepsiCo

Valuation metrics like Forward Price to Earnings (FWD P/E) and Forward Price to Sales (FWD P/S) ratios hold a mirror to the market's expectations of a company's growth and profitability. The FWD P/E for PepsiCo is 22.47 , contrasting with the sector median of 19.17 . This higher ratio typically suggests a stock is expensive compared to its peers. However, when this figure is accompanied by a Seeking Alpha Grade of 'C', it tells a more nuanced story. I could see PepsiCo potentially having an overstated price tag, but it seems to be a stock whose future earnings prospects might justify a higher price. When I consider the FWD P/E in the context of potential growth and earnings quality, the premium seems less like a cost and more like an investment in future value.

As we move to FWD P/S, here I see the stock at a ratio of 2.51 that is outpacing the sector median of 1.18 . This is illustrated at being 113.17% above the industry’s average, which is something to note. Despite what the 'D' grade from Seeking Alpha might suggest, I interpret this data point with optimism. A high P/S ratio can be indicative of a company that's not merely maintaining sales but is on a growth trajectory, reinvesting to scale up its operations and market reach. I think PepsiCo is signaling a more aggressive pursuit of growth than in their past, which potentially lays the groundwork for significant future revenue. I think this is a lens to digest because it reinforces my buy thesis and outlook for the company.

Monster Energy

Now as we move to Monster Energy, their FWD P/E of 37.52 is well above the sector median of 19.17 , indicating investors are willing to pay a higher price for the company's future earnings. To me, this suggests a belief in robust future growth or perhaps unique value propositions that the company offers. However, a high P/E also sets a higher expectation for the company to deliver substantial earnings growth to justify its valuation. It is definitely a high performing expectation for the company to meet. A Seeking Alpha grade of 'D-' in P/E GAAP (fwd) illustrates the need for caution, as it is hinting at the stock being potentially overvalued compared to sector averages.

On the other hand, the FWD P/S ratio tells a different aspect of the story. It sits at 8.52 , which is significantly higher than the sector's median of 1.18 . Typically this implies the market's willingness to pay a premium for each dollar of the company's sales. This could reflect a strong market position or a highly scalable business model. However, the 'F' grade from Seeking Alpha for the FWD P/S ratio cannot be ignored. I find that this suggests that, relative to its peers, the company's stock might be overpriced based on its sales. These grades and comparisons serve as a reality check, ensuring that my bullish thesis is grounded in a comprehensive understanding of both the company's potential and its current market perception.

Key Takeaway

The emergence of GLP-1 weight-loss drugs like those from Eli Lilly and Novo Nordisk is reshaping not only the pharmaceutical industry but also consumer markets. The key takeaway is that the specified drug companies are poised to make an increase in 2024, based on my recent analysis of Eli Lilly which you can read here , because of the growing demand and likely chance of insurance coverage. These drugs are making major impacts in the obesity management market, but I thought it was unique to note their influence among the snacking and energy drink sectors. I found that PepsiCo will likely maintain stable demand despite initial concerns from these weight loss drugs, because consumer spending will revert to familiar choices. And energy drink companies like Monster Energy could very well benefit, as reduced calorie intake from these drugs could increase the need for alternative energy sources. I found this cross-industry analysis quite interesting and I hope you comment below with your thoughts. The studies, statistics, and correlational factors solidify my positive outlook on each of these companies, as the ties between health and consumer behavior were prevalent.

Thank you for reading and I will be engaging with you in the comment section below!

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