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On Friday, Pepsico (NASDAQ:PEP) retained its Buy rating from a major financial institution, despite reporting softer than expected second-quarter results for 2024. The beverage and snack giant's organic sales growth (OSG) came in at 1.9%, below the consensus of 2.7% but in line with the more conservative 2% the firm had anticipated.
The company has revised its OSG forecast slightly downwards to approximately 4% from a previous minimum of 4%, while still expecting a minimum of 8% growth in earnings per share (EPS). This adjustment comes amid weaker volume trends observed in North America, particularly within its Frito-Lay North America (FLNA) division.
Despite the downward revision in top-line guidance, the firm expressed confidence in Pepsico's prospects over a 12-month period. The valuation of Pepsico at around 18.5 times the estimated EPS for the calendar year 2025 is considered attractive, given the company's mid-term OSG outlook of about 3-4% and a high single-digit percentage growth in EPS.
The maintained Buy rating is based on the belief that the 2024 OSG outlook, which requires a significant pickup in the latter half of the year, is not fully de-risked. This outlook is contingent on improvements in the North American business. Current US scanner data trends, which remain soft, may lead investors to remain skeptical about the aggressive top-line guidance for the second half of 2024.
In summary, while the short-term perspective on Pepsico may remain negative due to current trends and slight guidance adjustments, the long-term view is positive. The firm anticipates that Pepsico's current valuation does not fully reflect its growth potential in the coming years.
In other recent news, PepsiCo reported its second-quarter earnings, revealing an earnings per share (EPS) of $2.28, surpassing the projected $2.16, despite a sales figure that fell short of expectations.
The company adjusted its organic sales growth forecast for 2024 to around 4%, a slight decrease from the previous guidance. Targeted investments are in the pipeline to address weaker trends in its Frito-Lay North America segment, a move TD Cowen views as a sensible approach to maintain competitive edge.
RBC Capital, however, adjusted its outlook on PepsiCo, reducing the price target to $177 from $180, citing potential earnings pressures, particularly from the North America operations. The firm maintains a Sector Perform rating, expecting the stock to perform in line with the sector average.
PepsiCo's CEO, Ramon Laguarta, remains confident in meeting the updated targets, attributing this to the recovery of the Quaker supply chain, robust international growth, and targeted consumer value strategies.
PepsiCo anticipates short-term growth in Q3 and Q4, primarily driven by North America. However, temporary demand issues in Latin America, particularly Mexico, and a need for adjustments in value, execution, and innovation in the savory snacks category were noted.
InvestingPro Insights
In light of the recent analysis of Pepsico's performance and outlook, certain metrics and InvestingPro Tips can provide additional context to investors considering the company's stock. With a market capitalization of $225.2 billion and a P/E ratio standing at 23.8, Pepsico appears to be trading at a considerable valuation. The adjusted P/E ratio for the last twelve months as of Q1 2024 is slightly lower at 22.25, indicating a somewhat more attractive valuation in relation to the company's earnings.
InvestingPro Tips highlight Pepsico's longstanding commitment to shareholder returns, with the company having raised its dividend for 51 consecutive years. This is complemented by an impressive gross profit margin of 54.15% for the last twelve months as of Q1 2024, showcasing the company's ability to maintain profitability. However, it's worth noting that 8 analysts have revised their earnings downwards for the upcoming period, which suggests potential caution among market observers.
The company's revenue growth remains modest at 4.36% for the last twelve months as of Q1 2024, reflecting the challenges mentioned in the article. Despite this, Pepsico's dividend yield stands at 3.31%, which may appeal to income-focused investors.
For those seeking more comprehensive analysis, there are additional InvestingPro Tips available that delve further into Pepsico's financials, including its ability to cover interest payments with cash flows and its moderate level of debt. Using the coupon code PRONEWS24, investors can get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription to access these insights.
In conclusion, while near-term challenges are evident, Pepsico's financial health, as indicated by its solid gross profit margins and a history of dividend reliability, may provide some reassurance to investors with a long-term perspective.
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