JPMorgan: PepsiCo (PEP.US) North America business issues unresolved, rating downgraded to "Neutral", target price reduced to $138

According to Jinse Finance APP, due to the weak performance of the savory snacks division, combined with transportation pressures and disappointing trends in North America, Andrea Teixiera from JPMorgan expects that PepsiCo (PEP.US) will have to rely more on production efficiencies to achieve its full-year earnings per share guidance. However, this may not be sufficient to offset the weakness in the North American market. In her report, Teixiera lowered PepsiCo's rating from "Overweight" to "Neutral," and cut the target price by 19% to 138 USD.

She stated: "Earnings expectations are likely to continue to be revised downward. Faced with multiple pressures, investors will probably wait for expectations to return to reasonable levels before turning optimistic again."

Teixiera acknowledged that, thanks to favorable weather and the dividends brought by the FIFA World Cup, PepsiCo's international business has performed well this year. However, excluding these non-recurring favorable factors, the actual performance of the North American business is still likely to fall short of management's expectations, especially Frito-Lay North America (FLNA): despite adjustments to raw materials and packaging formulas, as well as adopting price reduction strategies, sales growth has not been effectively driven.

In addition, any improvement in Pepsi Foods North America (PFNA) seems to largely depend on macroeconomic conditions rather than any internal catalysts.

Teixiera said: "After the first quarter, the momentum for business recovery appears to have stalled." As a result, she lowered the estimated fiscal year 2027 earnings per share from 9.05 USD to 8.86 USD, and the fiscal year 2028 estimate from 9.57 USD to 9.33 USD.

On the bright side, the current valuation (price-earnings ratio of 15x) is roughly in line with industry peers, and there is limited room for further decline in the share price.

Teixiera noted: "We believe that if management can demonstrate more sustained improvement in FLNA sales—similar to the first quarter—and continue to achieve low single-digit organic sales growth with a solid margin structure over the next few years, a re-rating of the valuation is possible."

PepsiCo is scheduled to announce its third-quarter results before the US market opens on October 8. Ahead of this, Teixiera has already revised her organic sales growth and earnings per share forecasts from +3.2% and 2.31 USD to +2.8% and 2.29 USD, respectively, reflecting softer North American expectations, weaker-than-expected tracked channel data, and consumer headwinds, partially offset by growth in international markets.