PepsiCo Q3 EPS to be $1.50, Organic Sales to Grow 2.4%: Morgan Stanley

PepsiCo Inc’s third quarter is expected to be a positive catalyst for the stock with an expected organic topline and EPS beat, according to Morgan Stanley equity analyst Dara Mohsenian, who also forecasts Q3 EPS of $1.50 and 2.4% y-o-y growth in organic sales.

The U.S. multinational food, snack and beverage corporation, PepsiCo is set to report third-quarter 2020 results on Thursday, October 1, before market open.

“We continue to like Pepsi longer-term with a pronounced mix shift to the more attractive snacks business over the last few years with strong underlying fundamentals (even ex-COVID) now at more than two-thirds of corporate profit, with both robust, sustained snacks category growth, as well as PEP’s strong competitive positioning and share gains within snacks. We also see PepsiCo’s (PEP) growth outlook and underlying EPS quality as higher with greater reinvestment under a new CEO,” Morgan Stanley’s Dara Mohsenian said.

“Last, we believe PepsiCo’s valuation remains compelling, with PepsiCo trading one standard deviation below its 5-year NTM relative P/E average vs mega-cap peers and only at a 3% EV/EBITDA premium to food peers, despite much higher LT revenue growth potential (4% at PEP LT vs 2% at food peers), as well as higher margins/ROIC (see PEP Valuation Looks Compelling section below for more detail).”

Morgan Stanley forecast PEP organic sales growth to be driven by its snacks business, and a topline recovery in emerging markets, as well as a sequential improvement in on-premise beverages. In North America, they forecast a solid +6.5% organic sales growth at Frito-Lay North America (FLNA); +7.2% growth at Quaker Foods North America (QFNA); -1.0% decline at Pepsi Beverages North America (PBNA).

For the international business, the investment bank forecast +8.6% y-o-y organic sales growth in APAC on China recovering, +2.5% in Europe with on-premise improving and favourable summer weather, +1.5% in Latin America, and -2.3% in AMESA (Africa, Middle East, South Asia) on a slower recovery, particularly in India.

PepsiCo stock closed 3.30% higher at $137.97 on Monday. The stock is up about 1% so far this year.

Several other equity analysts have also updated their stock outlook. Jefferies raised their target price to $139 from $137; JP Morgan lowered their stock price forecast to $149 from $154; UBS raised the price target to $140 from $136; Deutsche bank upped their price objective to $140 from $139 and  Guggenheim raised their target price to $151 from $148.

Eleven analysts forecast the average price in 12 months at $144.64 with a high forecast of $155.00 and a low forecast of $130.00. The average price target represents a 4.83% increase from the last price of $137.97. From those 11 equity analysts, six rated ‘Buy’, five rated ‘Hold’ and none rated ‘Sell’, according to Tipranks.

“PepsiCo is our top beverage pick. We forecast Pepsi will post superior topline growth relative to peers driven by exposure to the higher growth/higher margin snacks category (2/3 of PEP’s profit). Snacks is a higher growth category given: (1) shift to snacking vs. sit-down meals; (2) less pressure from health/wellness vs. beverages, and (3) PEP’s leading share in snacks vs. fragmented competition, driving share gains, and higher margins/ROIC,” Morgan Stanley’s Mohsenian said.

“We also see more structural Pepsi market share benefits post COVID-19, as PEP uses its DSD distribution advantage, to gain shelf space and share in snacks, and in beverages, where PEP is advantaged vs competition with a much lower mix in away-from-home.”

Upside risks: Higher FLNA snacks topline growth, improving North America beverages business on higher investment spend and on-premise recovery, better GM expansion on favourable commodities/better pricing, and higher cost savings from restructuring.

Downside risks: Lower return from PEP’s reinvestment, macro volatility, commodity and FX volatility, greater COVID impacts, worse market share trends in beverages, soda taxes.

Check out FX Empire’s earnings calendar