On Wednesday, Wells Fargo (NYSE:WFC) reiterated an Equal Weight rating on Pepsico (NASDAQ:PEP) stock with a price target of $170.00. The firm's analysis highlighted potential challenges and uncertainties facing the company through 2025.
Despite Pepsico's management not expecting category growth to exceed 1% into 2025, they plan to leverage margins in PBNA (Pepsi Beverages North America) and International segments to counterbalance profit headwinds in FLNA (Frito-Lay North America). This approach suggests that profit growth, possibly even an 8% increase in EPS, could be within reach.
However, Wells Fargo expressed concern that this optimism might turn into a debate over potential overhang if the company's trends do not improve, raising questions about the feasibility of strong guidance followed by potential underperformance.
The firm also pointed out that Pepsico confirmed an expansion of value resets in its Doritos and Tostitos lines, which could signal increasing margin pressures in FLNA, thereby placing more responsibility on PBNA and International segments to uphold profits.
The analysis further noted that Pepsico's International organic sales growth has slowed, marking the lowest increase since Q1 2021, which could be indicative of a trend for other multinationals in the upcoming earnings season. Wells Fargo presented a scenario where, if FLNA's profit, which comprises about 40% of total profit, continues to decline into the first half of 2025, it might challenge Pepsico's ability to achieve an 8% EPS growth.
Wells Fargo's 2024 EPS estimate for Pepsico is down by one cent to $8.15, despite a 1.7% increase in organic sales, due to a projected 30% reduction in Q4 corporate expenses, potential asset sale gains in FLNA, and a slightly lower Q4 tax rate. Looking into 2025, the firm estimates a 3.2% increase in organic sales with varied growth across segments, and a 6.8% year-over-year increase in EPS to $8.71.
In conclusion, Wells Fargo acknowledges the positive performance of Pepsico's stock amid revenue weaknesses and limited visibility, attributing it to low expectations and previously communicated challenges.
The firm's stance reflects caution due to the potential worsening of revenue and profit trends in FLNA, along with pressures on other segments, which may not support a price-to-earnings expansion. The Equal Weight rating and $170 price target are maintained as Wells Fargo evaluates the potential for trend improvements, particularly in FLNA.
In other recent news, PepsiCo has outlined its growth strategies amidst market challenges during its Q3 2024 earnings call. The company expressed optimism about long-term growth, particularly in the Frito-Lay segment and international markets, despite changes in consumer behavior and geopolitical concerns.
PepsiCo is channeling its efforts into enhancing core products, investing in promotional strategies, and adopting digitalization to improve efficiency. The company anticipates low single-digit growth in full-year organic revenue due to U.S. consumer recovery and international geopolitical challenges.
It is also investing in core products like Lays and multi-tier offerings to drive volume growth. PepsiCo is focusing on portfolio-level margin management and stimulating consumer demand, despite facing margin pressures. These recent developments underline PepsiCo's commitment to navigating through current challenges with a clear vision for the future.
InvestingPro Insights
PepsiCo's financial metrics and market position offer additional context to Wells Fargo's analysis. According to InvestingPro data, PepsiCo boasts a market capitalization of $233.81 billion and a P/E ratio of 24.74, indicating investor confidence despite the challenges outlined in the article. The company's revenue for the last twelve months stands at an impressive $92.05 billion, with a gross profit margin of 54.64%, underscoring its strong market presence and operational efficiency.
InvestingPro Tips highlight PepsiCo's commitment to shareholder value, noting that the company has raised its dividend for 51 consecutive years and maintained dividend payments for 54 consecutive years. This track record of consistent dividend growth aligns with the company's strategy to leverage margins across different segments to sustain profitability, as mentioned in the Wells Fargo report.
However, it's worth noting that 8 analysts have revised their earnings downwards for the upcoming period, which corroborates Wells Fargo's cautious stance on potential challenges ahead. The company's high P/E ratio relative to near-term earnings growth also suggests that investors should carefully consider the stock's valuation in light of the projected slowdown in category growth and potential margin pressures in the FLNA segment.
For investors seeking a more comprehensive analysis, InvestingPro offers 12 additional tips on PepsiCo, providing a deeper dive into the company's financial health and market position.
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