Komo: Pepsi (PEP.US)'s North American business dilemma has not been solved. The rating was downgraded to “neutral”, and the target price dropped to $138

The Zhitong Finance App learned that due to the weak performance of the salty snacks sector, compounded by transportation pressure and disappointing North American trends, J.P. Morgan's Andrea Teixiera expects PepsiCo (PEP.US) to rely more on production efficiency to achieve its annual earnings per share guideline. However, this is probably not enough to offset the weakness in the North American market. In its report, Teixiera downgraded PepsiCo's rating from “surplus” to “neutral” and lowered its target price by 19% to $138.

She said, “Profit expectations are likely to continue to decline. Facing the current multiple pressures, investors may wait until expectations return to a reasonable level before turning back to optimism.”

Teixiera admits that PepsiCo's business has performed well this year thanks to favorable weather and the dividends brought by the FIFA World Cup. However, after excluding these non-recurring favorable factors, the actual performance of the North American business is likely to fall short of management expectations, especially Frederick's North American business (FLNA): despite adjustments to raw materials and packaging formulations and price reduction strategies, it has not been effective in driving sales growth.

Furthermore, any improvement in Pepsi's North American business (PFNA) appears to be largely dependent on macroeconomic conditions rather than any internally driven catalyst.

“After the first quarter, business recovery seemed to have stalled,” Teixiera said. As a result, she lowered her FY2027 earnings forecast from $9.05 to $8.86 and her FY2028 earnings per share forecast from $9.57 to $9.33.

On the positive side, the current valuation (15 times price-earnings ratio) is basically the same as industry peers, and there is limited room for further decline in stock prices.

Teixiera stated, “We believe that if management can show a more continuous improvement in FLNA's sales volume — similar to the first quarter — and can continue to achieve low single-digit organic sales growth in the next few years with a steady profit margin structure, then a reassessment of the valuation is possible.”

PepsiCo will announce the third quarter results in advance of the US stock market on October 8. Prior to that, Teixiera had lowered organic sales growth and earnings per share expectations from +3.2% and $2.31 to +2.29, respectively, to reflect weakening expectations in North America, weaker than expected tracking channel data, and consumer headwinds, partially offset by growth in the international market.