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On Tuesday, Barclays (LON:BARC) issued a revised outlook on Pepsico (NASDAQ:PEP) shares, downgrading the stock from Overweight to Equalweight and adjusting the price target to $156 from the previous $168. Currently trading at $151.34, InvestingPro analysis suggests the stock is slightly undervalued. The reassessment by Barclays reflects a cautious approach towards Pepsico’s near-term volume recovery, particularly within its Frito-Lay North America (FLNA) division. This aligns with recent data showing 7 analysts revising their earnings expectations downward for the upcoming period.
The research firm’s analysts pointed out that Pepsico is increasingly seen as a U.S. food company, and as such, its stock sentiment is closely tied to FLNA’s performance. Despite challenges, InvestingPro data shows impressive gross profit margins of 54.89% and strong financial health metrics. They anticipate that it may take several more quarters for the division’s trends to stabilize. This outlook is influenced by what Barclays perceives as an uncertain macroeconomic environment.
Despite the near-term concerns, Barclays maintains a belief in FLNA’s potential to achieve sustainable volume growth of around 1.5% and organic sales growth (OSG) of approximately 3% in the longer term. The analysts also recognize Pepsico’s ability to reach the lower end of its sales and profit growth targets, which are set at +4-6% for sales and +7-9% for profits. This growth potential is supported by PepsiCo’s impressive track record of raising dividends for 52 consecutive years, as highlighted in InvestingPro’s comprehensive analysis (one of 12 key ProTips available for subscribers).
Barclays’ valuation of Pepsico considers the potential risks and rewards, suggesting that the company’s current valuation with a high-teens multiple strikes a balance. It accounts for the near-term caution regarding FLNA while acknowledging the limited downside risk of Pepsico failing to achieve its long-term growth objectives, thanks to its international momentum and productivity measures.
The revised price target of $156 reflects Barclays’ adjusted expectations for Pepsico’s stock performance, taking into account the factors likely to influence the company’s growth trajectory in the upcoming quarters.
In other recent news, PepsiCo announced its acquisition of the prebiotic soda brand Poppi for $1.95 billion, including anticipated cash tax benefits that reduce the net purchase price to $1.65 billion. This acquisition aligns with PepsiCo’s strategy to expand its portfolio with healthier beverage options, responding to the increasing consumer demand for wellness-oriented products. Poppi, known for its low-calorie, prebiotic-rich sodas, was founded by Allison and Stephen Ellsworth and gained recognition after appearing on Shark Tank. PepsiCo’s CEO, Ramon Laguarta, emphasized the company’s commitment to offering more positive choices to consumers. Additionally, PepsiCo is pushing for tariff exemptions on imports such as cocoa and tropical fruits, as part of a broader effort to support U.S. manufacturers and reduce consumer inflation. In a strategic shift, PepsiCo has also introduced an "Inclusion for Growth" strategy, replacing its previous Diversity, Equity, and Inclusion initiatives. This new approach focuses on fostering a culture of inclusion and aligning sponsorships with business objectives. These developments highlight PepsiCo’s ongoing efforts to adapt to evolving market and consumer trends.
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