PepsiCo cut at Morgan Stanley as 'fundamental struggles continue'

Morgan Stanley downgraded PepsiCo (NASDAQ:PEP ) from Overweight to Equal-weight in a note Friday, citing ongoing challenges with topline growth and market share losses. The firm maintained a $185 price target on the stock.

Morgan Stanley lowered its organic sales growth (OSG) and earnings-per-share (EPS) estimates, highlighting persistent softness in the U.S. market and muted category growth despite recent efforts by PepsiCo to boost spending and promotions.

Morgan Stanley had previously upgraded PepsiCo to Overweight in March, expecting a turnaround in the second half of the year as the company cycled easier comparisons, moved past Quaker recall issues, and regained pricing power.

However, the analysts admitted this call was "wrong," as weakness in the company's Frito-Lay North America (FLNA) segment continued, and beverage market share trends deteriorated.

"As FLNA OSG weakness has lingered, price interventions/higher spend do not seem to be driving a meaningful snacks topline payback, and beverage market share trends have worsened, along with moderating, albeit still solid international OSG as pricing contribution slows sequentially," wrote Morgan Stanley.

The report noted that PepsiCo's stock has risen nearly 10% from its recent lows, aligning with a broader rally in defensive large-cap stocks.

Despite the stock trading at 20x 2025 EPS, which is relatively low compared to peers, Morgan Stanley sees little upside.

"With weak group fundamentals and relatively low valuation at 20x 2025 EPS vs peers, we see PEP stock downside as limited, so are EW," the analysts wrote.

However, Morgan Stanley is concerned about further downside risk to PepsiCo's Q3, Q4, and FY25 performance, with EPS growth expected to come in below PepsiCo's high-single-digit algorithm.

The firm also warned that if recent reinvestment efforts do not generate stronger results, the need for additional spending in 2025 could further pressure earnings growth.

Morgan Stanley cut its FY25 EPS forecast by around 2%, with a 6% EPS growth estimate that is also 2% below consensus.

Source: Investing.com