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Inflation is taking its toll. Pepsico was sounding the alarm on consumer spending in its most recent quarter that saw sales volume for Frito-Lay in North America drop 4%, but there are still opportunities for investors in the wider consumer staples category, and we're looking at how you can navigate that space with the Yahoo Finance Playbook. Joining us now, Nick Modi, RBC Capital Markets managing director. Nick, it is good to see you. So, uh you cover PepsiCo. So let's start there. I'm interested, Nick, to get your thoughts on the earnings uh report there, Nick, and also whether you thought there were any kind of kind of read throughs from that report for other names uh in your coverage universe, Nick.

Yeah, absolutely, Josh. So, look, PepsiCo is a incredibly high-quality company. There's no question about it. Um you don't really have to worry about them delivering on earnings because I think they have a very good productivity pipeline um and are very good at managing their P&L. But the top line was really the problem. And look, the snacking categories come under a lot of pressure for a variety of reasons. Um I think partly due to economic pressure, especially with low-income consumers that tend to overindex to this category. So I think that's partly what they're dealing with. This is not just a PepsiCo problem. This is a problem for the entire snacking industry, and quite frankly, the entire package food industry is is under a lot of pressure to to your point about read-throughs. As we get through this earnings season, it's going to be very evident that package food companies are going to have to spend more money than they originally thought to really drive volume in this current environment.

And Nick, it's Julie here. When you say spend more money, do you also mean cut their prices for consumers?

Well, I I think yes and no. I mean, I I I think what what they're going to do right now is a lot of temporary promotions to really understand kind of how consumers are responding uh to the different price points, right? Now, there's not just price cuts. You know, there's other alternatives. You can offer smaller pack sizes that are lower priced. You can offer innovation that might add benefit uh which consumers are willing to pay up for. So actually instead of getting a price cut, you get slight price increase without actually raising the price itself. So there's a lot of things they can do, but yes, I do think promotional spend and marketing spend is going to ramp up in the back half of this year.

You know, Nick, it was interesting to uh kind of read through PepsiCo management how they talked about the consumer, and they talked about persistent inflationary pressures, higher borrowing costs, you know, tighter household financial conditions. Is that is that kind of your read on the consumer, Nick, just based on on the companies you cover?

Yeah, absolutely. I mean, you look, inflation, you know, going up 30% for these products uh over the last few years, uh takes its toll. Um but it's not just inflation and these categories. It's inflation and everything that consumers are doing from electricity bills to your insurance bills to your mortgages. And so this is, you know, we have to really understand in the grand scheme of things we are looking at an overall wallet issue, um and consumer products is just a piece of that. Um but it's something that these companies have to contend with given how much prices have gone up uh over the past two years.

Um and so let's get to what you do like, Nick, uh still within your coverage. And in particular, beverages. I find it really interesting that you highlight constellation brands as one of your pick because that's one, as you point out in your most recent note, that investors really haven't believed in. Um and they maybe more broadly haven't believed in the beer story either. Why do you believe in it?

Yeah, I mean, look, you know, we we tend to take longer-term approaches. Um this company has been able to deliver exactly what they've said uh in their beer business going back the last 10 years. Um all the work that we do with distributors with retailers suggests that there's still significant upside in Modelo Especial penetration across the country and as well as Pacifico and even Modelo Chelada, which which has had grown to be a pretty nice size business for constellation. I think this management team is doing all the right things. I think there's still significant upside. I still think high single digit revenue growth is the right uh trajectory for this company over the next several years, and I just don't think the valuation is reflecting it. Now, I can't control how investors view information, but from what I see, looks like they're actually doing everything that they've said they're going to do, and they're outperforming all their peers, but they're trading at a discount.

And Nick, and another name you like, and I think it's interesting, I want to hear the story, Monster Beverage. You know, that stock has not been working, Nick, in the red this year, in the red over the last 12 months, but you you see better times ahead. How come?

Yeah, I I think uh you know, to me, Monster, you know, we've had to buy on Monster for over 10 years, straight. And the stock's gone up, you know, three and a half X over that time frame. To me, Monster, the real thesis is that this is the next global mega brand, right? When you think about a Red Bull or a Coca-Cola, like the Monster brand has shown that it can transcend category and country. And so I think there's a lot of opportunity for this brand to grow internationally. Just think about this, Josh. There are more drinkers of energy drinks in China than people in the US. Okay? And they haven't even gained significant traction yet. That category is still building. India is another great example. So I think there's a lot of upside, but when I kind of think about where we are right now with the stock, given the pullback that it's had, I think that this is an opportune time to be buying the stock if you're uh a new investor or even an existing investor because I do think the back half is going to improve through a series of investments. They're going to take a price increase in November, which I think will help the help the top line, uh and the international growth story continues to have momentum.

Nick, so good to have you on the show today. Thanks for taking the time to join. Appreciate it.

You bet.