Kraft Heinz Trades at a Fraction of PepsiCo's Valuation. Is the Discount Deserved?

When valuing a company, you need to look beyond the share price. It's important to use a metric like the price-to-earnings (P/E) ratio or price-to-sales (P/S) ratio to make an objective judgment.

However, that's only one part of the investing process. You have to see why a company trades at a relatively cheap valuation. Sometimes, the market is signaling long-term concerns, and in other cases, investors have become overly focused on short-term issues.

You can't use the P/E ratio to evaluate Kraft Heinz (NYSE: KHC) due to its lack of earnings. But investors can apply the P/S ratio. On that basis, it trades at a much lower valuation than PepsiCo (NASDAQ: PEP).

Should investors view Kraft Heinz as a value opportunity or a value trap they should avoid?

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The comparison

Kraft Heinz's shares have a P/S ratio of 1.2 versus 1.8 for PepsiCo, as of Sept. 18. That's a significant difference. And both trade at a significant discount to the S&P 500 index's (SNPINDEX: ^GSPC) 3.8 multiple.

Things haven't gone well since Kraft Foods and H.J. Heinz merged in July 2015. In an effort to turn the business around, the board of directors brought in Steve Cahillane as CEO, and he started on Jan. 1.

Early in his tenure, Cahillane canceled the previously announced split of the businesses into groceries and sauces/spreads. He decided to increase spending on marketing, sales, and R&D by $600 million.

Still, it's hard to see how this impacted results, with sales continuing to weaken. Second-quarter sales fell 1.3%, after adjustments to exclude foreign-currency translations and divested assets. For all of 2026, management expects a 0.5% to 2% decline in sales.

PepsiCo's turnaround has been going better. After discussions with activist investor Elliott Investment Management, the company took steps to increase sales growth. This included lowering prices, developing new products, and cutting costs.

The immediate consumer response to cutting prices has been positive, with volume picking up. PepsiCo's second-quarter adjusted revenue grew 2.4% compared to a year ago, with higher volume accounting for 1 percentage point of the increase.

Value stock or value trap?

After looking at both companies, it's time to make an informed investment decision.

With Kraft Heinz's challenges reflected in its slumping sales, it seems like the discounted valuation to PepsiCo and the S&P 500 is warranted. Hence, it has all the makings of a value trap, and I'd avoid Kraft Heinz's shares.

However, PepsiCo's stock should pique value investors' interest given its lower valuation versus the market and the company seemingly moving in the right direction.

Lawrence Rothman, CFA has no position in any of the stocks mentioned. The Motley Fool recommends Kraft Heinz. The Motley Fool has a disclosure policy.