Why Macquarie Prefers Pepsi Over Coca-Cola

PepsiCo, Inc. PEP, under the leadership of new CEO Ramon Laguarta, is well-positioned to deliver sustainable 4-6-percent sales growth, according to Macquarie.

The Analyst

Analyst Caroline Levy upgraded PepsiCo from Neutral to Outperform with a price target lifted from $107 to $126.

The Thesis

Laguarta presented a credible strategy to investors to accelerate sales growth by "doubling down on what is working" and moving quicker to fix problems, Levy said in the Tuesday upgrade note.

The beverage company is not only looking to become faster than its peers, but stronger by re-investing cost savings in the business and becoming a better and more sustainable company through a "performance with purpose" strategy aided by the SodaStream acquisition, the analyst said.

Unlike some of PepsiCo's peers, the parent company of Gatorade and Doritos will likely show gross margin expansion this year, Levy said. This would represent an "impressive feat" given multiple cost headwinds like input and transport pressures, she said.

Macquarie's revised $126 price target is based on a P/E multiple of 23 times 2019 estimates of $5.51 and 21 times 2020 estimates of $6.01.

This is a premium multiple versus rival The Coca-Cola Co KO given the sell-side firm's expectations for PepsiCo to show 5-percent annual sales growth on average over the next three years along with 8-9-percent EPS growth from 2020 through 2023.