PEP is an excellent long-term buy; current price ($125) is ~40% below fair value ($178).

PepsiCo's stock started 2026 strongly, rising to over $170 per share, then came the war in Iran. This situation has caused Pepsi's stock to completely collapse, and it is now trading near its lowest level in 52 weeks at $125 per share.

But I think this is an excellent buying opportunity for long-term investors, as they can acquire a high-quality company at a very cheap price and hold onto it for a very long time, or forever if they wish.

Interestingly, the Pepsi management team is facing challenges as a result of the war in several different ways . The most important way the Pepsi management team highlighted is in small shops and gas stations, where they are seeing far less conversion to Pepsi product sales.

People are visiting gas stations less frequently in an effort to save on trips and fuel, but when they do visit , they spend so much on gasoline that they are not in the mood to go into the store to buy Pepsi products.

This leads to a significant decrease in Pepsi sales in that sector.

On the other hand, rising fuel prices and diesel costs increase Pepsi's operating costs, don't they? Consider all the distribution operations that Pepsi has to carry out from its warehouses and manufacturing facilities.

All of these distribution operations are now carried out at a higher transportation cost, which puts pressure on profit margins.

Therefore, they are experiencing a decrease in spending by consumers with less disposable income, and they are also facing an increase in operating costs. It's a double whammy that no business owner or commercial manager wants to suffer.

In the long term, Pepsi's business has grown well, and the management team has predicted and reaffirmed that they believe they can increase their revenues by mid- to high single-digit percentages.

I think this will be a huge success. If Pepsi can increase its revenue by 6 to 8% as management expects while maintaining profit margins, I think that will add significant value to shareholders over the next 5, 10 and 25 years.

Pepsi generated $97 billion in revenue, up nearly 50% from the $60 billion it recorded in 2017. Pepsi also faces long-term challenges. They mainly work in selling sugary drinks and salty snacks.

This is not exactly what consumers are currently heading towards.

In general, people are choosing healthier options, and that's not good news for Pepsi. It is adapting and trying to offer healthy options, but this is not the area where it excels , and this will create some competitive disadvantages if consumer behavior continues to move in this direction, especially if this shift accelerates.

I mentioned that those effects on margins were negative, but one positive aspect for PepsiCo was the recovery of the customs duties. So, the tariffs were extremely negative for Pepsi.

Trade barriers are generally negative for international companies, especially since their main market in North America, in the United States, does not have much manufacturing within the United States.

It relies on outsourcing much of that because of the lower cost of manufacturing overseas, which has created difficult situations when bringing in products.

However, despite those headwinds, you can see that Pepsi 's operating profit margin has increased over the past decade. It started 2022 with an operating profit margin of approximately 14%, and that has since increased to 15.5%.

Pepsi's returns on invested capital were not excellent, but they were above average and above its average weighted cost of capital . At 14.5%, it is higher than the company's weighted average cost of capital .

When a company operates with a return on invested capital to average cost of capital ratio equal to one or more, it adds value to shareholders for every dollar reinvested in the company.

So, it's a good number, and it's been on an upward trend for the last year and a half.

Given the customs duty refund, this should provide an upward incentive for this margin. Then, in the near term, headwinds due to high oil prices and low consumer spending should be a balancing force.

So , Pepsi faces headwinds in the short term and structural ones in the long term, while the enabling factors are few and far between.

So, understandably, you would n't expect Pepsi stock to trade at a high valuation, which it isn't . In fact, it is trading at its lowest valuation in years. Based on a forward price-to-earnings ratio, PepsiCo is trading at just 14, which is cheaper than it has been in a very long time.

In addition, I updated the discounted cash flow valuation for PepsiCo. This is a model in which I estimate the amount of cash flow that a company will generate between today and the very long term, and I discount those cash flows to today because money in the future is worth less to us than the money in our pockets today.

By combining all these calculations and arriving at the result, I calculated a fair value of $178 for a PepsiCo share. The current market price of $125 is about 40% lower than my estimate of the intrinsic value.