October 12, 2020

Pepsi Stock Has Been Falling Behind. Why That Could Change.

[Barron’s, Getty Images]

PepsiCo shares were rising on Monday, following an upgrade from Citigroup, which argues that the food-and-beverage company can increase its bottom line next year.

Analyst Wendy Nicholson boosted her rating on Pepsi (ticker: PEP) to Buy from Neutral, and raised her price target to $169 from $148. She writes that Pepsi “can continue to be a relatively consistent top line growth story.” That, coupled with improving margins at its North American beverage business, should mean “EPS growth will accelerate in 2021.”

Nicholson also covers Coca-Cola (KO) and Procter & Gamble (PG) and, while they are obviously different businesses, she says it is instructive to compare the three, given that they are “each massive global enterprises with dominant market share positions in their categories.” And of the three, Pepsi has delivered the most consistent organic sales growth, she notes.

Barron’s has written previously that Pepsi is one of the consumer staples expected to have robust organic growth next year, a key indication that major brands are still connecting with consumers.

Pepsi’s operating margins are also the lowest, but Nicholson thinks it also has the most room to expand these in the coming years, contributing to bottom-line growth.

Rising earnings per share would justify the stock trading at a premium, Nicholson writes, and that could help it break out of a pattern of underperformance. While P&G outperformed the S&P 500 in three of the past five years—including year-to-date—and Coke did so in one in the past five, Pepsi has underperformed each year. “To the extent Pepsi’s EPS growth accelerates as we expect it will, we believe the stock’s relative multiple can expand considerably from current levels,” she concludes.

By Teresa Rivas

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