On Monday, BofA Securities updated its outlook on Pepsico (NASDAQ:PEP), reducing the price target to $190 from the previous $210, while still affirming a Buy rating on the stock. The adjustment by the firm reflects concerns about the soft demand persisting in the food and beverage industry as the year progresses.
The industry's challenges were highlighted by General Mills (NYSE:GIS)' recent miss on its fourth-quarter North America sales and the delay in volume acceleration.
Despite a period known as the "Snap-Lap," which usually indicates fewer price increases and a return to standard marketing, merchandising, and promotions, demand has remained subdued. BofA Securities notes that Pepsico's Snacks and Beverage businesses are showing volumes below expectations according to measured channel data.
Should this trend continue, Pepsico might face a difficult choice between striving to meet earnings targets and taking a step back to recalibrate, potentially by reducing costs. While BofA Securities believes there is a low probability of this occurring in the second quarter, the likelihood may increase later in the year. The firm suggests that Pepsico's management might opt for a strategic pause, as seen in previous years (2004, 2012, and 2019), to set the stage for future progress.
Consequently, BofA Securities has also revised its earnings per share (EPS) estimates for Pepsico for fiscal years 2024 and 2025. The new EPS forecasts have been lowered from $8.15 and $8.84 to $8.08 and $8.54 respectively, which still represent a 6% growth for each year. The lower projections are a result of reduced expectations for second-quarter organic sales growth to 2.5% and for the full year 2024 from 4.5% to 3.7%.
The revised price objective of $190 factors in the current market conditions and is based on a 22 times multiple, down from the previous 24 times. This new price target anticipates that Pepsico's stock will revert to historical relative ranges as sales stabilize.
Despite the reduced target and the anticipated challenges, BofA Securities reaffirms its Buy rating on Pepsico shares, citing the rerating of multiples and the company's longer-term earnings stability.
In other recent news, PepsiCo has been the subject of various analyst adjustments and strategic moves. TD Cowen lowered its price target for PepsiCo shares to $190, citing concerns over a downturn in the U.S. salty snacks sector.
Despite this, the firm maintained a Buy rating, acknowledging PepsiCo's consistent value generation and robust management. Similarly, Goldman Sachs kept its Buy rating on PepsiCo, setting a $195 price target, despite lowering estimates due to weaker-than-expected performance in North American segments.
Deutsche Bank also revised its outlook, lowering the price target from $185 to $180 and maintaining a Hold rating, due to sluggish U.S. consumption trends and potential risks from Latin American currency devaluations. In contrast, Jefferies raised its price target to $211 from $209, maintaining a Buy rating, and anticipating positive margins in PepsiCo's North America Beverages.
PepsiCo also increased its quarterly dividend by 7%, marking the 52nd consecutive annual rise. Furthermore, the company agreed to waive a change of control clause in its bottling arrangements with Britvic, potentially facilitating Carlsberg (CSE:CARLb)'s prospective acquisition of the British soft drinks maker.
InvestingPro Insights
In light of BofA Securities' revised outlook on Pepsico, a dive into the latest InvestingPro data and tips provides additional context for investors. Pepsico's market capitalization stands strong at $223.53 billion, with a forward P/E ratio of 22.11, indicating a reasonable valuation relative to its near-term earnings growth. The company also boasts a robust gross profit margin of 54.15% over the last twelve months as of Q1 2024, underlining its impressive profitability in the Beverages industry.
InvestingPro Tips highlight Pepsico's consistent shareholder returns, with the company having raised its dividend for an impressive 54 consecutive years. Additionally, its cash flows are sufficient to cover interest payments, demonstrating financial resilience. These insights, coupled with the fact that analysts predict the company will remain profitable this year, offer a counterbalance to concerns over short-term demand fluctuations.
For those seeking to delve deeper into Pepsico's financial health and future prospects, InvestingPro has 11 additional tips available. Investors can use the coupon code PRONEWS24 to get up to 10% off a yearly Pro and a yearly or biyearly Pro+ subscription, gaining access to comprehensive analyses that could inform investment decisions in the current market climate.
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